S&P Insurance Company Capital Methodology Changes
February 28, 2022
On December 6, S&P Global Ratings proposed changes to its methodology on insurance companies’ risk-based capital adequacy. The methodology examines the insurance company’s portfolio holdings, much of which includes structured credit, and determines the appropriate capital charges. Significant increases in capital requirements on CMBS have the potential to dull demand for the product. The changes are open for comment, and responses are due March 18, 2022.
CMBS Capital Charges to Increase under Proposed Changes
The proposed changes to S&P’s capital model include an adjustment on how S&P treats insurance company investments in private-label CMBS, CRE CLOs, and other structured products not rated by S&P. The S&P capital adequacy model is an important component of insurance company ratings.
Under the proposed revisions, if S&P does not rate the transaction, CMBS bonds rated by Fitch and Moody’s would be penalized less than other rating agencies. To date, S&P has not ‘mapped’ other agency ratings to its methodology; under this scenario it is therefore notching these bonds to CCC in its model.
The proposed methodology would downgrade bonds held in portfolio as follows:
The proposed changes would not impact the actual rating of the bond in a life company’s portfolio, but suggest than an insurer hold more capital in order to maintain current corporate rating. As noted earlier, the proposed changes do have the potential to dampen demand for certain asset classes from a core component of the CMBS investor base, and further exert widening pressure on bonds.
Congressional Scrutiny
As reported by Politico, Congressman Brad Sherman (D-CA), a noted antagonist of rating agencies, criticized the move and said the House Financial Services Committee will hold a hearing on the issue. Sherman chairs the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, which held a hearing on credit rating agencies last July. Click here for CREFC’s coverage of the hearing.