ABIR opposes S&P’s ‘disruption’ of senior debt

The Association of Bermuda Insurers and Reinsurers (ABIR) is strongly opposing a proposal by Standard & Poor’s Global Ratings to disallow senior debt as a form of available capital, calling the draft plan “disruptive” and an “overuse of market power".

ABIR argues that the proposal runs counter to traditional finance theory that defines a firm’s capital structure to include debt.

S&P has requested comments by April 29 on its proposed methodology and assumptions for analysing the risk-based capital adequacy of insurers and reinsurers.

In an 18-page letter to S&P, ABIR has warned that the rating agency's current proposal is “unduly onerous”, especially pertaining to the treatment of debt as part of a carrier’s capital base for claims-paying ability.

“In its request for comment, S&P defines capital as ‘available to absorb losses in the insurance businesses.’ Debt issued by a Bermuda-based holding company satisfies this definition, given the Bermuda Monetary Authority’s requirements that Tier 3 issuances demonstrate that the holding company's obligations in relation to the senior debt are subordinated to policyholder obligations,” ABIR CEO John Huff explained.

Huff added: “Consequently, S&P’s proposed removal of credit conflicts with the regulator and all other rating agencies, which consider debt as part of a firm’s capital base.”

Existing securities represent long-term commitments by issuers, ABIR stressed, “which investors will seek a high price to unwind”. Existing securities were issued in good faith, it added, taking into consideration established regulatory and rating criteria.

“Carriers have issued over a billion dollars of capital in recent years that was rated by S&P without any indication at the time that future eligibility for total adjusted capital (TAC) could change, and these securities might be expected to receive anything less than full credit,” ABIR said.

This debt is viewed as capital by the regulators, Huff stressed. If carriers are forced to restructure debt, they’ll get less favourable terms today, he said, and any replacement debt will increase financial leverage, which is counter to the stability people seek from a rating agency.

“It’s an overuse of their market power,” Huff said of S&P. “It will have a negative impact on ratings for the Bermuda market without any reasonable justification or market changes. It is clearly anti-competitive.”

The other key issue ABIR points out is an “ambiguous” timeline and lack of a transition period for the rollout of the changes. Insurers and reinsurers will have no time to respond to the new debt treatment before S&P has indicated the changes will go into effect, ABIR said.

“A comment period then will be useless,” Huff said. “These abrupt changes are incredibly disruptive. Standard & Poor’s should be adding stability, not causing instability.”

ABIR represents Bermuda’s major property and casualty insurers and reinsurers doing business in 150 countries.