On December 6, 2021, S&P Global Ratings released a request for comment (RFC) on proposed updates to its Insurer Risk-Based Capital Adequacy Methodology and Assumptions. The RFC generated significant market controversy in regard to the treatment of non-S&P rated securities held by insurance companies. More specifically, (1) to the extent an insurance company holds a security rated by S&P, that rating will be taken at face value when S&P calculates the insurance company’s capital charge associated with such security; (2) if the security is rated by Moody’s and/or Fitch, the rating will be lowered one to three notches; and (3) if the security is rated by any other credit rating agency (CRA), the security will be notched down to as low as CCC, depending on asset class and country.

The S&P proposal notes it completed a mapping exercise for both Moody’s and Fitch, and the related downward notching for securities rated by these two agencies is the result of this mapping. S&P has publicly told the market it does not have enough data to perform a mapping exercise for all other CRAs. The public comment deadline is scheduled to close on April 29, 2022, following two extensions.

KBRA believes that the capital markets are best served by well informed and reasoned opinions, and that rating agencies are entitled to their views just as much as other market constituents. That said, S&P’s move would equate investment-grade securities with capital charges that are commensurate with deep speculative grade ratings which, in our opinion, is neither well informed nor well-reasoned.

A CCC rating is typically defined as a security that is determined to be near default and at substantial risk of loss. However, the very fact that S&P does not rate a security does not mean that such security is on the verge of default with limited recovery prospects. In this report, KBRA highlights the level of stress required to impair high IG-rated securities in certain selected sectors. Simple math suggests that attributing a CCC capital charge to investment-grade (IG) securities is generally not a fair assessment, especially for high IG categories, regardless of the sector.

Click here to view the report.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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