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ABIR slams 'disruptive' S&P Global proposals on debt capital

Proposals to disallow senior debt as a form of capital are ‘unduly onerous and an overuse of market power’ and to run counter to traditional finance theory, Bermuda re/insurance association says

The Association of Bermuda Insurers and Reinsurers (ABIR) has described as “disruptive” and an “overuse of market power” proposals by S&P Global Ratings to disallow senior debt as a form of available capital.

In a technical response to S&P, the association said the proposals relating to the treatment of debt as part of a carrier’s capital base for claims-paying ability were “unduly onerous”.

The association warned S&P’s proposals to run counter to traditional finance theory, which defines a firm’s capital structure to include debt, adding existing securities were issued in good faith, taking into consideration established regulatory and rating criteria.

It pointed out carriers have issued more than $1bn of capital in recent years that was rated by S&P “without any indication at the time that future eligibility for total adjusted capital could change and these securities might be expected to receive anything less than full credit”.

The ABIR said the debt is viewed as capital by the regulators and if carriers were forced to restructure debt, they would get less favourable terms today. Any replacement debt will increase financial leverage, which is counter to the stability people seek from a rating agency, it added.

ABIR chief executive, John Huff, 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 the holding company's obligations in relation to the senior debt are subordinated to policyholder obligations.”

“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.

Huff said the proposals were an overuse of S&P’s 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,” he said.

The ABIR also warned of 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, making a comment period useless, the association said.

“These abrupt changes are incredibly disruptive. S&P should be adding stability, not causing instability,” Huff said.

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