A Standard & Poor’s Global Ratings’ proposal to disallow senior debt as a form of available capital, continues to run into headwinds, with the Association of Bermuda Insurers and Reinsurers strongly opposing the draft plan they labelled “disruptive” and an “overuse of market power”.

Abir has sent an 18-page letter to S&P, including a technical response on numerous fronts.

S&P had sought, by last Friday, feedback to its proposed methodology and assumptions for analysing the risk-based capital adequacy of insurers and reinsurers.

Abir said that S&P’s current proposal was unduly onerous, especially pertaining to the treatment of debt as part of a carrier’s capital base for claims-paying ability.

The association’s CEO John Huff said: “S&P seeks to potentially remove capital credit for senior debt, which is counter to traditional finance theory that defines a firm’s capital structure to include debt.”

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abir COMMENT TO s&p.pdf

He added: “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.”

Mr Huff continued: “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.”

Abir points out that existing securities represent long-term commitments by issuers, “which investors will seek a high price to unwind. 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 could change, and these securities might be expected to receive anything less than full credit.”

Mr Huff said that this debt was viewed as capital by the regulators. 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’s an overuse of their market power,” he 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 anticompetitive.”

The other key issue Abir points out is an ambiguous timeline and lack of a transition period for the roll-out 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.

“A comment period then will be useless,” said the executive.

“These abrupt changes are incredibly disruptive. Standard & Poor’s should be adding stability, not causing instability.”

Abir’s letter to S&P also outlines objections in other key areas.