The Association of Bermuda Insurers and Reinsurers (ABIR) has said that it is ‘strongly opposing’ a proposal from Standard & Poor’s Global Ratings to disallow senior debt as a form of available capital.
A statement from ABIR said that the drafted plans were ‘disruptive’ and an ‘overuse of market power’. The organisation said that it had put together an eighteen-page letter detailing its technical response to the proposals. ABIR said that the current proposal is unduly onerous, especially pertaining to the treatment of debt as part of a carrier’s capital base for claims-paying ability.
John Huff, CEO of ABIR, said: “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.”
He 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.”
In its release, ABIR said that existing securities represent long-term commitments by issuers and that investors would see a high price to unwind.
ABIR added: “Existing securities were issued in good faith, 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.”
Huff said that carriers would get less favourable terms if they sought to restructure debt. Any replacement debt, he said, would increase financial leverage, countering the stability that people sought from a ratings agency.
He added: “It’s an overuse of their market power. 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.
