The impact of regulatory payment limitations on Bermuda’s sector.

S&P Global Ratings conducted a new analysis on how regulatory payment restrictions affect the credit ratings of non-operating holding companies (NOHCs) within Bermuda’s insurance industry.

NOHCs typically rely on dividends and other distributions from operating companies to meet their financial obligations, introducing additional credit risks compared to operating entities.

The level of regulatory constraints on transferring resources from operating companies to NOHCs plays a crucial role in assessing the creditworthiness of NOHCs relative to their operating counterparts. S&P Global Ratings evaluates these regulatory restrictions at the jurisdictional level and then applies the analysis to individual issuers based on their unique characteristics.

Generally, NOHCs of insurance groups receive ratings two notches below their core operating subsidiaries if potential payment restrictions are low, and three notches if they are high. Moreover, if an issuer is deemed to have low potential regulatory restrictions, S&P Global Ratings includes the NOHC’s debt in group Total Adjusted Capital (TAC) only if it possesses loss-absorbing capabilities.

The assessment by S&P Global Ratings does not reflect on the effectiveness of regulatory authorities but serves as the basis for comparing the creditworthiness of NOHCs and operating companies. In jurisdictions like the US and Israel, operating company payments to NOHCs face higher restrictions, resulting in less fungible cash flows. Conversely, jurisdictions with lower regulatory restrictions allow smoother cash flow movements to NOHCs.

In Bermuda, the regulatory framework, including the Bermuda Insurance Act and insurance group supervision rules, has been evaluated. The Bermuda Monetary Authority (BMA) oversees local insurance companies and indirectly influences the parent or head of the group through groupwide supervision.

The dividend considerations for operating companies under the Bermuda Insurance Act, which require regulatory notification instead of preapproval, are unlikely to constrain cash flows from Bermuda-based operating companies to NOHCs under normal conditions.

The BMA’s emphasis on group supervision, including oversight of group solvency, suggests a lower likelihood of restricting cash flow to NOHCs, even in stressed scenarios. Consequently, Bermuda-based operating companies are generally subject to low potential regulatory restrictions on their payments to NOHCs, especially if they are part of groups under the BMA’s group supervision.

As a result, senior debt issued by these NOHCs would not be considered debt-funded capital in TAC, unless the instruments have loss-absorbing features.

For Bermuda-based operating companies not 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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