S&P’s surprise second capital model RfC extension: how and when will the final outcome be deployed?
April 6th, 2022
S&P’s1 second RfC extension (to April 29th), and the sheer volume of questions S&P appears to be receiving, mean we are pushing our best guess timeline on public release of its new model and formal adoption of the new methodology (“Step 3” in our guide to the process below) to sometime between the late Summer and early to middle Autumn.
- On that same day, the list of ratings “under criteria observation” (the “UCO” list), a description of all the RfC replies, and comments on how the agency assessed those replies will also be published by S&P.
- A pair of wildcards in getting to that point may be how S&P chooses to handle the public questioning by significant third parties of two proposals the agency states will enhance its global consistency: cessation of the use of NAIC designations for the bond portfolios of US insurers, and the treatment of operating insurer equity funded by non-equity-like debt issues by non-operating holding companies.
- The expected timeline from Step 3 to resolution of the status of most (if not all) UCO list ratings (Step 4) remains just a matter of weeks not months.
- We understand “rating triggers” for all ratings not on the UCO list (and hence not expected to be subject to any rating action) will continue to be reviewed for some time after the UCO ratings list resolution.
- Changes to rating triggers, if they occur, are not rating actions but are part of how S&P seeks to maximise ratings transparency by highlighting what S&P deems the most likely potential sources of a future rating upgrade or downgrade, were that to happen.
On March 7th S&P announced a highly unusual action: a second extension of the “Request for Comment” (“RfC”) time period (which will now end on April 29th).
Litmus’ 5 Step guide to this process for S&P rated insurers and reinsurers published on March 3rd is essentially unchanged by this extension other than for the impact on our best estimate timelines for Step 2 which we update below.
One possible change had been that, in its webinar of March 8th covering the RfC extension, S&P appeared to note that it might need the full 6-month period available to resolve the status of some ratings impacted by the finalised changes (once adopted). Our subsequent discussions with the agency have clarified this as follows:
- Ratings on the S&P “under criteria observation” (“UCO”) list will be prioritised for resolution: S&P continues to expect that the status of at least most of these ratings, if not all, will be resolved within weeks of the UCO list issuance.
- However, the agency will also be seeking to review the “rating triggers” of all ratings not on the UCO list, in case they are deemed to be impacted by the new methodology. Completion of that process may take a few months.
- S&P’s rating triggers are part of the agency’s approach to transparency. For each rated organisation S&P typically publishes the main potential sources of a rating upgrade or downgrade, even when the agency’s rating suggests neither action is likely based on its current expectations (as is the case for any rating that is not on CreditWatch and has a stable outlook).
Summary of Litmus’ 5 step guide and adjustments to our best guess on timelines
Step 1 – The end of the (extended) RfC period.
Step 2 – S&P reviews the RfC replies, makes decisions on any changes to the original proposals and finalises those, gathers information from rated firms and decides which ratings will be on the UCO list.
S&P has confirmed to Litmus that the extension of Step 1, and the receipt of data from rated firms for populating the new model (a template for which S&P issued to rated firms several weeks ago), does not allow it to begin any part of Step 2 ahead of the completion of Step 1. Therefore, there is no acceleration of the completion of Step 2 due to the extension of Step 1.
Indeed, our best guess now is that Step 2 will take three to five months (rather than our previous estimate of two to three months), but there remains no defined minimum or maximum timing. The sheer volume of questions we understand S&P was continuing to receive more than fifteen weeks after the RfC was issued could suggest that Step 2 may take longer than is typical.
Step 3 – Launch Day (Litmus’ term). S&P formally adopts the new methodology
Our current best estimate is that this is likely to be in late Summer or early to middle Autumn based on Litmus’ current estimation of the Step 2 completion timing noted above, although the range of possible timing is wide. Step 3 (“Launch Day”) is the point in time when all of the following happen:
- The new model is formally adopted by the agency and published (reflecting all and any changes the RfC process has led S&P to make).
- The UCO list of all ratings S&P believes may be impacted by the new methodology is published (although this published list will not show what that impact might be).
- Companies on the UCO list are told that for the first time by the agency.
- S&P publishes details of the RfC feedback received, highlighting where and why it made changes following consideration of the comments provided, and also explaining why and where comments received did not result in any changes to the proposed methodology.
Step 4 – UCO rating list resolution
Our best guess remains that this will take no more than a matter of several weeks for most UCO cases; and may possibly be quicker for some.
By launch day (Step 3) we expect S&P to be fairly sure of where it is likely to end up for most of the UCO list but, to that point, communications with rated firms by the agency will not have overtly disclosed the significance or – explicitly – the source of any rating impact.
Step 4, therefore, includes the formal process of communication with rated firms on the UCO list in the light of: the new model; other elements of how the agency applies its ratings framework that the model changes could impact given the firm’s own credit profile; and, of course, the potential rating impact itself.
Notwithstanding the prior information acquisition process in Step 2, this is likely to lead to further exchanges of information, insight, and perspective between the agency and most UCO-listed firms.
In our discussions with S&P, the agency has stressed that it will not compromise the quality of that information acquisition process and/or dialogue with UCO firms just to resolve any given UCO status quickly. However, we do expect the agency to focus heavily on achieving resolution as rapidly as possible, and to be very conscious of avoiding time-consuming debate or information exchange on items it does not consider material to its final rating decision.
Step 4 ends for each UCO listed firm with the agency publishing one of: an affirmation of the current rating and outlook; a changed rating and/or outlook; or, the rating being placed on CreditWatch.
Step-5 – The time period for remedial action to happen if it is to be credited in S&P’s UCO status resolution.
The RfC extension, and Litmus’ subsequent discussions with S&P, have not changed our expectations on this – namely that a rated insurer or reinsurer with a remedial plan that restores the prior credit profile (per S&P’s rating methodology), and where S&P has high confidence in management’s ability to deliver within the agency’s forward-looking timeframe (two years beyond the end of the current year), may have that expected outcome recognised within the UCO review process.
1 References throughout this note to “S&P” mean “S&P Global Ratings”.
2 Since NAIC designations can reflect ratings from any of eight agencies (as well as the NAIC’s own research) – including what the NAIC deems five “smaller” agencies – S&P is currently indirectly reflecting those ratings in its model to the degree they impact any given NAIC designation on a bond held by a US insurer or reinsurer.
3 BICRAs are S&P’s “Bank Industry Country Risk Assessments”. Their use in this context applies to bonds and loans, not reinsurance recoverables.
About Litmus Analysis
Litmus Analysis specialises in helping the insurance and reinsurance industry understand credit risk and the ratings agencies. Its main areas of work are Ratings Advisory (helping companies manage their relationships with the rating agencies), cedant analysis, insurer and reinsurer financial profiling and stress testing, market analysis, peer reviews & benchmarking and market security/counterparty credit management (including the InsurTech application LitmusQ).
The team of consultant analysts all have a rating agency and/or broker market security background and includes the former heads of S&P Ratings Europe (insurance), A.M. Best EMEA and A.M. Best Asia Pacific.
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