Regulatory solvency ratio volatility ‘could increase deferral risk for hybrids’, S&P says

Written by Adam Cadle

26/03/2020

Insurers issuing hybrid capital instruments that have coupon deferral requirements tied to a regulatory solvency ratio must monitor the sensitivity of their regulatory solvency ratios to equity or credit spread movements, S&P Global Ratings has urged.

S&P Global Ratings said “investors in these hybrid instruments could be at heightened risk of having their coupons deferred if an insurer’s solvency ratio drops below such a contractual threshold”.

“We may reflect this increased risk of coupon deferral to hybrid investors by widening the notching between the ratings on the hybrids and the rating on the issuer itself.”

The ratings agency added that it is closely monitoring the solvency ratios and their sensitivity to market movements for those issuers that have issued rated hybrids that include these mandatory deferral features. “These are most common in EMEA and Bermuda,” it said.

As COVID-19 is continuing its rapid global spread, the economic impact has worsened sharply. Nevertheless, S&P Global Ratings said it expects that the insurance industry’s “robust capital position” and “limited exposure to loss-affected lines of business” will enable most insurers to absorb the impact of financial market volatility and manage the marginal increase in claims.

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