Regulatory Signs :1 Payment Limitations On Bermuda’s Industry
The impact of regulatory payment limitations on Bermuda’s industry
S&P Global Ratings looked at how regulatory payment limitations affected non-operating holding companies’ (NOHCs) credit ratings in the Bermuda insurance market in a recent report.
In contrast to their operating companies, NOHCs usually rely on dividends and other distributions from these businesses to meet their financial obligations, which poses additional credit risks.
According to the statement, one important consideration in evaluating the creditworthiness of NOHCs in comparison to the group’s operating entities is the degree of regulatory restrictions on the transfer of resources from operating companies to NOHCs.
S&P Global Ratings assesses these possible regulatory limitations at the jurisdiction level in its report, then applies this analysis to specific issuers in light of their distinct features and profiles.
Regulatory Capture
S&P Global Ratings’ evaluation serves as the foundation for the creditworthiness comparison between NOHCs and operating companies, but it does not include any opinion on the efficacy of a regulatory body.
Operating companies’ payments to NOHCs are seen as having greater restrictions in places like the US and Israel, which reduces the fungibility of cash flows.
On the other hand, there are less restrictions on cash flow movements to NOHCs in jurisdictions with minimal potential regulatory restrictions.
Bermuda’s system of operations
The regulatory environment in Bermuda has been evaluated, including the insurance group supervision guidelines and the Bermuda Insurance Act.
By virtue of groupwide supervision, the Bermuda Monetary Authority (BMA), which exercises prudential oversight over regional insurance companies, also indirectly influences the parent or head of the group.
Even in high-stress situations, there may be less chance of limiting cash flow to NOHCs given the BMA’s emphasis on group supervision, which includes the capacity to monitor group solvency.
Regulatory Capture
Therefore, S&P observed that, in general, Bermuda-based operating companies are not subject to many regulatory restrictions on their payments to NOHCs, especially if they belong to groups that are supervised by the BMA.
Therefore, absent loss-absorbing characteristics, senior debt issued by these NOHCs would not qualify as debt-funded capital in TAC.
S&P Global Ratings will evaluate any regulatory limits to payments on an individual basis for operating companies based in Bermuda that are not a part of groups supervised by the BMA.
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