In a new report, S&P Global Ratings examined the impact of regulatory payment restrictions on the credit ratings of non-operating holding companies (NOHCs) in the Bermuda insurance industry.
NOHCs typically depend on dividends and other distributions from operating companies to fulfill their financial obligations, which introduces additional credit risks compared to their operating companies.
The extent of regulatory restrictions on the transfer of resources from operating companies to NOHCs is a key factor in determining the creditworthiness of NOHCs relative to the group’s operating entities, it was stated. In its report, S&P Global Ratings evaluates these potential regulatory restrictions at jurisdiction level and then applies this analysis to individual issuers based on their unique characteristics and profiles.
Typically, NOHCs of insurance groups are rated two notches below their core operating subsidiaries if potential restrictions to payments are low and three notches if they are high. Additionally, if a specific issuer is deemed to have a low potential for regulatory restrictions in making payments to its NOHC, S&P Global Ratings only includes the NOHC’s debt in group Total Adjusted Capital (TAC) if it features loss-absorbing capabilities, such as coupon deferral or principal write-down without causing a default.
S&P Global Ratings’ assessment does not involve any judgment on the effectiveness of a regulatory authority but forms the basis for the creditworthiness comparison between NOHCs and operating companies. In jurisdictions like the US and Israel, operating company payments to NOHCs are viewed as having higher restrictions, making cash flows less fungible. Conversely, in jurisdictions with low potential regulatory restrictions, fewer limits exist on cash flow movements to NOHCs.
In Bermuda, the regulatory framework, including the Bermuda Insurance Act and insurance group supervision rules, has been assessed. The Bermuda Monetary Authority (BMA), which has prudential oversight over local insurance companies, also indirectly influences the parent or head of the group through groupwide supervision.
The Bermuda Insurance Act’s dividend considerations for operating companies, which require regulatory notification rather than preapproval, are seen as unlikely to restrict cash flows from Bermuda-based operating companies to NOHCs under normal conditions.
The BMA’s focus on group supervision, including the ability to oversee group solvency, suggests a lower likelihood of restricting cash flow to NOHCs, even in stressed scenarios. As such, S&P noted that Bermuda-based operating companies are generally subject to low potential regulatory restrictions on their payments to NOHCs, particularly if they are part of groups under the BMA’s group supervision.
Consequently, senior debt issued by these NOHCs would not be eligible as debt-funded capital in TAC, unless the instruments have loss-absorbing features.
For Bermuda-based operating companies that are not part of groups under the BMA’s group supervision, S&P Global Ratings will assess potential regulatory restrictions to payments on an individual basis.
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