Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk ...

87 Pages·2012·0.86 MB·English

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(Editor'sNote:OnDec.20,2021,werepublishedthiscriteriaarticletomakenonmaterialchanges.Seethe"RevisionsAnd ANALYTICALCONTACTS
Updates"sectionfordetails.)
AliKarakuyu
1. S&PGlobalRatings'risk-basedcapital(RBC)adequacymodelisaquantitativetoolthatisintegral London
toouranalysisofthecapitaladequacyoflife,property/casualty(P/C),healthinsurance,and [phone]
reinsurancecompaniesworldwide.Webaseouroverallopinionofaninsurer'slevelofcapital ali.karakuyu
@spglobal.com
adequacyoninsightsdrawnfromthismodel,evaluatedinconjunctionwithmorequalitative
PatriciaAKwan
factors.Theseincludethecompositionoftheinsurer'scapitalstructure(e.g.,howmuchitrelies
NewYork
onhybridsecuritiesanddebttofunditsoperations);itsassetquality,reserveadequacy,
(1)212-438-6256
contingentassetsandliabilities;itsdependencyonreinsurance;anyriskconcentrations;andits
patricia.kwan
capitalplanningandfinancialflexibility. @spglobal.com
2. Variationsinglobalaccountingstandardsandcomplexlegalentitystructurespresentchallenges METHODOLOGYCONTACTS
intheanalysisofinsurancecompanycapitalization,butwehavetakenaglobalapproach,noting MichelleMBrennan
regionalexceptionsthroughout.Ouropinionistypicallyexpressedintermsofadjustedcapital London
beingeitherredundantordeficientacrosstargetedlevelsofrisk-adjustedcapitalization, (44)20-7176-7205
consistentwiththeratinglevel. michelle.brennan
@spglobal.com
3. Thecapitaladequacyoutcomefromthemodelisonlyastartingpointforjudgingcapitalization.
MarkButton
Weapplyqualitativeandquantitativeenhancementsaswarrantedtoderiveamore-complete
London
pictureofaninsurer'scapitalposition.Theseadjustmentsplayacriticalroleinassessingrisks
(44)20-7176-7045
thatareuniquetoacompany,whilemaintainingtheabilitytocomparecompanies. mark.button
@spglobal.com
4. S&PGlobalRatingsisrefiningitsmethodologyandassumptionsforevaluatingthecapital
adequacyofinsurancecompanies.Wearepublishingthisarticletohelpmarketparticipants
betterunderstandourapproachtoreviewinginsurancecompanies.Thisarticleisrelatedtoour
criteriaarticle"PrinciplesOfCreditRatings,"whichwepublishedonFeb.16,2011.
SCOPEOFTHECRITERIA
5. S&PGlobalRatingsisupdatingitscriteriaforitsRBCadequacymodeltoupdateandrefine
severalareas.Weundertakeperiodicreviewsoftheappropriatenessandlevelofthefactor-based
chargesinourenhancedrisk-basedcapitalmodel.Theupdatesfocuson:
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Criteria | Insurance | General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance
Capital Model
- Asset-relatedriskcharges,includingasset-liabilitymanagement(ALM)withintheInternational
FinancialReportingStandards(IFRS)/generallyacceptedaccountingprinciples(GAAP)andU.S.
statutorymodels;
- Methodologiesthatwerealsoreviewedforappropriatenessandchargesupdatedtoreflectthe
mostrecentmarketdataofthepastfouryears;and
- Themodelthathasbeenexpandedtoincluderegionalvariations,includingtheintroductionof
region-specificmodelsforAsia-Pacific,LatinAmerica,andCanada.
- CapitalchargesforU.S.variableannuitiesthathavebeenrevised.
SUMMARYOFCRITERIAUPDATE
6. Thisarticlesupersedes"AnalysisOfInsurerCapitalAdequacy,"publishedonDec.18,2009.
Notablechangesinclude:
- Revisedriskchargesforasset-relatedrisks:equities,ALM,property,andcredit(including
loans,reinsurancerecoverables,bankdeposits,andpreferredstock);
- Additionofregion-specificriskchargesforAsia-Pacific,LatinAmerica,andCanada,primarily
elementsoftotaladjustedcapital(TAC)andnon-lifepremiumandreservecharges.
7. Appendix1liststhechangesinmoredetail.
8. Thisparagraphhasbeendeletedasitcontainedinformationthatwasapplicableontheoriginal
dateofarticlepublication(June7,2010)butisnolongerrelevant.
9. Thisparagraphhasbeendeletedasitcontainedinformationthatwasapplicableontheoriginal
dateofarticlepublication(June7,2010)butisnolongerrelevant.
METHODOLOGY
Summary
10. Themodelseekstodeterminetheamountofcapitalinexcessofreservesthataninsurance
companyneedstocoverlossesfromdisparaterisksovertheexpectedlifeofitsportfolio.The
resultsindicatetheamountofcapitalcorrespondingtovaryingconfidenceintervalsthatS&P
GlobalRatingsconsiderscommensuratewithagivenratingcategory.Inthemodel,eachrisk
variableisstressedusingtheseconfidencelevelsandourempiricallyobservedcumulative
five-yeardefaultsacrossratings,asestablishedattheinceptionofthisenhancedmodelin2007.
Althoughthemodelmeasurestheimpactofthestressedriskvariablesovertheexpectedlivesof
theassetsandliabilities,thevolatilityusedtocreatethestressedscenariosisbasedonpotential
movementsexpectedoveraone-yearperiod.
11. Inotherwords,weareseekingtocapturethepresentvalueofexpectedeconomiclosses(change
inshareholderequity/policyholdersurplus)experiencedoverayear,toadegreeofcertaintythatis
commensuratewiththerating.Theconfidencelevelsestablishingthedegreeofcertaintyforeach
individualriskare:97.2%for'BBB',99.4%for'A',99.7%for'AA',and99.9%for'AAA'.
12. S&PGlobalRatingsgivesexplicitcreditfordiversificationwithinthecapitalmodel,albeitatlevels
likelytobemore-conservativethanthoseusedbymanyinsurersintheirinternalmodels.The
approachreflectsourconservativeviewoncorrelationsinthetail,throughtheapplicationof
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correlationmatricesspecificallydesignedforthismodel.Italsopartlyreflectsthelimitationson
thefungibilityofdiversificationcreditsacrossaconsolidatedgroup.
13. Implicitdiversificationcreditisalsoembeddedinmanyofthecharges(e.g.,equityandmortality)
whereindicesandindustryleveldataarebeingused.Thediversificationcreditcalculatedbrings
thesumofthecapitalrequirementforeachriskatthevariousratinglevelstoalevel
commensuratewiththeconfidencelevelconsistentwiththerating.
14. AnotherreasonwhyS&PGlobalRatingschosetobeconservativeinitsmodel'sexplicit
diversificationcreditisthatsomediversificationisimplicitinthechosenconfidenceintervalsfor
eachriskcharge.Wegeneratedthesefromfive-yeardefaultdata,whichwedeemeda
more-appropriatemeasuretocalibrateeachchargethanthemore-onerousone-yearhorizon.We
seetheone-yearhorizonappliedinsomeregulatoryregimesanditgeneratesahigher
diversificationcredit.
CapitalModelInContext
15. Thisparagraphhasbeendeleted.
16. Themodelcreatesaconsistentinitialapproachtomeasuringaninsurer'scapitaladequacy.Still,
resultsareprimarilyguideposts,notabsolutebenchmarks,bywhichtogaugecapitaladequacy.A
vitalpartoftheassessmentofcapitaladequacyincorporatesadjustments--bothqualitativeand
quantitative--tothemodel.Thesequalityofcapitaladjustmentsmayconsider:
- Aninsurer'sabilitytointernallygeneratecapitalandself-fundgrowththroughearnings.Allelse
beingequal,weusuallyviewcompanieswithlongtrackrecordsofconsistentlygoodearnings
ashavingastrongercapacityforreliablecapitaldevelopmentthancompanieswith
more-volatileperformance.Wealsoconsideraninsurer'sprospectivegrowthplansin
conjunctionwithmanagement'scommitmenttomaintainingorenhancingsurplusadequacyor
runningaleanercapitalstructure.
- Potentialcallsoncapitalorsourcesofcapitalsupport.Affiliatesmightlooktotheratedentity
forfuturecapitalsupport,oraparentmightdevelopanincreasinglyaggressiveappetitefor
dividends.Alternatively,aparent,subsidiary,oraffiliatemaybeabletoprovidefuturecapital
support.Eithermayalterhowweviewaninstitution'scapitalstrength.
- Qualityofasset/liabilitymanagementtechniques.Generally,S&PGlobalRatingsviews
companieswillingtoacceptincrementalrisklessfavorablythanthoseadheringto
more-prudentpractices.Acompany'sdemonstratedunderstandingoftherisksundertaken
alsoinfluencestheassessment.
17. Since2005,S&PGlobalRatingshasbeenassessingthestrengthofERMwithininsurancegroups.
Theinsightthistooloffersintomanagementtechniquesusedtoassess,quantify,andmanage
riskprovidesanimportantelementofouranalysisofcapitaladequacy.
18. Inparticular,thesophisticatedriskmodelsnowemployedbyinsurancegroupsaspartoftheir
ERMframeworkwillcomplementthefactor-basedapproachofS&PGlobalRatings'capitalmodel.
Thefactor-basedmodelbenefitsfromsimplicityandglobalconsistencyandhelpstocutthrough
themyriadassumptionsthatdrivetheresultinthemore-complexeconomiccapitalmodels.By
assessingtheoutputofbothS&PGlobalRatings'capitalmodelandtheinsurer'sownmodel,S&P
GlobalRatingsexpectstoderiveaninformedopinionofcapitaladequacy(see"ANewLevelOf
EnterpriseRiskManagementAnalysis:MethodologyForAssessingInsurers'EconomicCapital
Models,"publishedonJan24,2011).
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Capitalmodelframework
19. S&PGlobalRatings'capitalmodelisdesignedunderagloballyconsistentframework.Regional
factorsareappliedtoreflectfeaturesuniquetoalocalmarket.Thefactor-basedmodelreflects
observedvolatilityoverperiodsof15to30years,dependingontheriskfactor,supplementedby
scenario-basedanalysiswhereappropriate.
20. Inourview,themodelimprovestheanalyticalvalueofourratingsprocessbybetterlinking
expectedcapitaladequacytorisk.Itprovidestransparencytothemarketplaceastothelevelof
stressthatisappliedandclearlydefinestherisksencompassed.Webelievethemodelparallels
advancesinriskmanagementandmeasurementcurrentlybeingmadeintheinsuranceindustry,
whichwillmakeiteasiertoapplythemodelinconjunctionwithinternal(economic)capital
models.Themodelappliesawell-definedandconsistentframeworktomeasureexposureacross
allcategoriesofrisk(e.g.,mortalityrisk,underwritingandreservingrisk,creditrisk,andfinancial
marketrisk).
21. ThemodelcalculatesatargetlevelofRBCatvariousratinglevels,basedonthecompany's
specificriskprofile.Thetargetcapitalcapturesmarket,credit,operational,andrecoverability
risksaswellasinsurancebusiness-relatedrisksofpricing,interestratemovementsrelativeto
interest-ratesensitiveproducts,mortality/morbidity,catastrophicrisks,andlossreserving.
22. Aninsurancecompany'stotaladjustedcapitaliscomparedwiththeleveloftargetcapital.At
variousratinglevels,aredundancyordeficiencycanbequantifiedagainstthetargetcapital.
ASSUMPTIONS
DefiningCapital:AGlobalApproach
23. S&PGlobalRatingsprovidesratingsoncompaniesinmanypartsoftheworld.Insodoing,even
withtheadventofInternationalFinancialReportingStandards(IFRS),weencountermany
differentaccountingframeworks.Wehavecreatedtwomeasuresthatnormalizetheresulting
measuresofownerequityonamore-consistentbasis:totaladjustedcapital(TAC)andeconomic
capitalavailable(ECA).
Totaladjustedcapital/Economiccapitalavailable--IFRS/GAAPmodel
24. TACisthemeasureS&PGlobalRatingsusestodefinethecapitalavailabletomeetacompany's
capitalrequirementsinourcapitaladequacymodel.S&PGlobalRatingscalculatesTACusinga
globallyconsistentmethodology.Itisanarrowcapitalmeasurereflectinganear-termviewonthe
realizationofassets.
25. Forexample,TACreflectstheabilitytopartlyrealizetheoff-balance-sheetvalueofin-forcelife
insurancebusinessthroughreinsuranceorsecuritizationsinarelativelyshorttimeframe.Itisalso
influencedmorebythecurrentregulatoryviewsofcapitalthanbyaneconomicview.TACincludes
nonownercapitalthatcanabsorblosses,suchashybridcapital,andformsofpolicyholdercapital
thatcanbeusedtoabsorbriskacrossanorganization,suchasdiscretionaryfundsbacking
participatinglifeinsurancepolicies.
26. ECAisabroader,moreeconomicviewofowner(shareholders,orpolicyholdersinthecaseof
mutuals)capitalwithalonger-termviewoncrystallizingvalue.Itreflects,forexample,theability
topartlyrealizethevalueofgoodwilloverthelongtermthroughassetsalesorenhancedearnings.
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Generallyacceptedaccountingprinciplesorstatutory?
27. Forcompaniesorgroupsproducingfinancialstatementsinaccordancewithgenerallyaccepted
accountingprinciples(GAAP),wenormallycalculateTACandECAfrominformationcontainedin
thosestatements.However,incertaincountries(e.g.,theU.S.)somecompaniesonlyproduce
financialstatementsinaccordancewiththelocalregulators'basis(statutorybasis)ofaccounting.
S&PGlobalRatingsmaydrawTACandECAfrominformationcontainedinthestatutorybasis
financialstatementsiftherearenoGAAPfinancialstatementsorifthestatutorybasisfinancial
statementsprovidegreaterdepthandbreadthoffinancialinformation.
28. Increasingly,manycompaniesinjurisdictionsthatfocusonstatutorysolvencyhavesubsidiaries
andaffiliatesthatoperateoffshore--eitheraslocalcompaniesconductingbusinessin
internationaljurisdictionsorasoffshorecaptivereinsurers.Inthosecases,analysisbasedpurely
onstatutoryinformationmightmisssignificantriskstothegroup.Therefore,S&PGlobalRatings
hasexpandeditsuseofGAAPcapitalmodelsonaconsolidatedgroupbasis.Thisanalysiswillnot
replacestatutoryanalysis,whichisstillimportanttoassurelocalstatutorysolvency.Butthe
primarymeasureofgroupcapitaladequacywillfocusonGAAP/IFRSanalysistocapturegroup
risksonamore-appropriateeconomicbasis.
Consolidatedorunconsolidated?
29. S&PGlobalRatings'insurancegroupratingmethodologyoutlinescriteriaforevaluatinginsurance
groups.Thisisfoundedinitiallyonananalysisofaconsolidatedgroup.Wetreatitasifitwerea
stand-alonecompany,anddetermineanopinionofitscreditworthinessasifitwereasinglelegal
entity--theGroupCreditProfile(GCP).Thenwedeterminewhethereachinsuranceoperating
companysubsidiaryiscore,highlystrategic,strategicallyimportant,moderatelystrategic,or
nonstrategictothegroup.Finally,takingthatassessmentintoaccount,weassignratingstothe
group'ssubsidiaries.TheGCPwouldnormallydeterminethecreditworthinessofcoremembersof
agroup.
30. S&PGlobalRatingspreferstobaseitsanalysisfordeterminingtheGCPonagroup'sconsolidated
financialstatementsandwecapturethegroupcapitalonaconsolidatedbasis.Forexample,this
consolidatedbasisincludesalltheoperationsofthegroup,thuseliminatingtheeffectsofdouble
leverageandintragrouptransactions.Nonethelessweremaincognizantofanindividuallegal
entity'scapitalinrelationtolocalsolvencyrequirements.Theratingsonindividualgroup
subsidiariesmaybeinfluencedinpartbythecompany'sindividualfinancialstatements(which
mayormaynotbeconsolidated).Whereapplicable,wemaymakeadjustmentsfordouble
leverage.
ComponentsofTAC
31. TACisreportedstatutorysurplusorGAAPreportedcommonshareholderequity,adjustedfor
certainitemsthataffectthequalityofthesurplus/equity.
Table1
ComponentsOfTotalAdjustedCapital
Reportedshareholders'equity/policyholdersurplus
Plus Equityminorityinterests*
Plus Equalization/catastrophereserves*
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Table1
ComponentsOfTotalAdjustedCapital (cont.)
Plus Prudentialmarginsincludedinreserves
Minus Proposedshareholderdividendsnotaccrued
Minus Standard&Poor’simpairmentofgoodwill
Minus Otherintangibleassets
Minus On-balance-sheetunrealizedgains/(losses)onlifebonds*¶(posttax§)
Plus Off-balance-sheetunrealizedgains/(losses)oninvestmentsotherthanlifebonds*(posttax§)
Minus Off-balance-sheetpensiondeficits(posttax§)
Minus On-balance-sheetpensionsurpluses(posttax§)
Plus Upto100%ofoff-balance-sheetlifevalueofin-force(posttax§)
Plus Property/casualtylossreservesurpluses/(deficits)(posttax§)
Plus Property/casualtylossreservediscount
Plus Discountedunearnedpremiumreserve
Plus/Minus Analystadjustments
=ECA(economiccapitalavailable)
Minus RemaininggoodwillafterStandard&Poor'simpairment
Minus Investmentinunconsolidatedsubsidiaries,associates,andotheraffiliates
Minus Investmentsinownshares/treasuryshares
Minus 50%deductedofoff-balance-sheetvalueofin-force(posttax)
Minus 50%deductedoflifedeferredacquisitioncosts(posttax)
Minus 100%deductedofproperty/casualtydeferredacquisitioncosts
Minus 50%deductedofproperty/casualtylossreservesurpluses
Minus 33%deductedofproperty/casualtylossreservediscount
Minus 50%deductedofdiscountedunearnedpremiumreserve
Plus Policyholdercapitalavailabletoabsorblosses
Plus/Minus Analystadjustments
=TACbeforehybridcapitaladjustments
Plus Hybridcapital(subjecttotolerancelimits)
Minus Excessoverhybridtolerance
=TotalAdjustedCapital
*Wherenotalreadyincludedinshareholders'equity.¶Subjecttofairvalueexception.§Wheretaxeffectisnotdiscloseduseeffectivetaxrate.
32. ForthosejurisdictionswhereS&PGlobalRatingscontinuestoevaluatecapitalprimarilybasedon
statutoryaccounting,thestatutorydefinitionsofTACareused.
DescriptionOfTACAndECAAdjustments
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Equityminorityinterests
33. Often,equityminorityinterestsalreadyformpartofshareholderequity,butifnot,wewilladd
themtoTACbecausetheyconstitutecapitalcontrolledbyagroup'smanagement.
Equalization/catastrophereserves
34. EqualizationandcatastrophereservesarenotpermittedunderU.S.GAAPorIFRSbecausethey
relatetofutureunexpectedevents.However,theystillremaininsomenationalGAAPsand
statutoryaccounting.S&PGlobalRatingsregardsthesereservesasequity.
Prudentialmarginsincludedinreserves
35. Insomecountries,suchasAustralia,explicitmarginsarerequiredaspartofreportedliabilities.
WeaddaproportionofthesemarginsbacktoequityforTACandECApurposes.Theproportion
variesdependingonthemarginofsufficiencyincludedintheliabilities.
Proposedshareholderdividendsnotaccrued
36. Ifthefinancialstatementsincludeaproposedlevelofshareholderdividendrelatingtothepast
financialyearthatisnotaccruedinthebalancesheet,wedeductitfromshareholderequityin
derivingTAC.
Goodwill
37. GoodwillissubjecttoanS&PGlobalRatingsimpairmentchargeinthecalculationofECA,and
deductedinfullfromshareholder'sequitytoderiveTAC.
Unrealizedgainsoninvestments
38. Treatmentofunrealizedgainswilldependonthebalance-sheettreatmentofliabilities.TACmay
includefullcreditforthemarketvalueofinvestments,exceptforbondinvestmentsmatchedwith
nonlinked(orgeneralaccount)lifeinsuranceliabilities.However,bondinvestmentmarketvalues
maybeincludedinTACandECAifmatchingbalance-sheetliabilitiesarevaluedona
market-consistentbasis(thatis,wheremovementsininterestratesaffectbothassetandliability
values).
39. Accordingly,whereunrealizedgains/lossesareon-balance-sheet,weusuallyremovegains/losses
onbondsmatchingnonlinked(orgeneralaccount)lifeinsuranceliabilitiesfromTACandECA.
However,ifliabilitiesarevaluedonamarket-consistentbasis,wemakenoadjustment.
40. Conversely,whereunrealizedgains/lossesareoff-balance-sheet,wetypicallyaddgains/losses
oninvestmentsotherthanbondsmatchingnonlinked(orgeneralaccount)lifeinsuranceliabilities
toTACandECA.
41. Fornon-lifebusinessandshareholderfunds,wenormallyaddthemarketvalueofbondstoTACif
theyareoff-balance-sheet.
42. Theabovecommentsprovideabasepositionfortheanalysis.However,theissuesarisingfrom
differentaccountingstandardsindifferentregulatoryregimesmeanfurtheranalyticaljudgment
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Criteria | Insurance | General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance
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mayberequiredtobetterreflecttheeconomicposition.
Pensions
43. Companiesincreasinglydeductdefined-benefitemployeepension(orlong-termhealthcare)
schemedeficitsfromtheirbalancesheetswhencalculatingshareholders'equity.Wheresuch
deficitsareheldoff-balance-sheet,S&PGlobalRatingsusuallydeductsthefullamountin
derivingTAC.Thisincludesdeficitsthatremainoffbalancesheetwherethecorridormethodis
used.
44. Allon-balance-sheetamountsrelatedtodefined-benefitemployeepension(orlong-termhealth
care)schemesurplusesarealsoremovedfromTAC,giventhelackoffungibilityofsuchsurpluses.
45. Wherethecapitaladequacymodelsofsubsidiariesarebasedonstatutorybasisfinancial
statements,pensiondeficitscanrarelybeallocatedtothosesubsidiaries.Wegenerallyonlymake
pensionadjustmentsaspartofourcapitalanalysisoftheconsolidatedgroup,basedonGAAP.
46. Thisparagraphhasbeendeletedbecauseitwassupersededby"InsurersRatingMethodology,"
publishedJuly1,2019.
Valueofin-forcelifeinsurancebusinessandlifedeferredacquisitioncosts
(GAAPmodel)
47. Balancesheetstendtounderstatetheeconomicvalueoflifeinsurancebusinessglobally,
althoughthedegreeofunderstatementvaries.Whereavailableandaudited,S&PGlobalRatings
usesembeddedvalueanalysistonormalizeitsbalance-sheetanalysis(and,moreimportantly,its
earningsanalysis)acrosstheglobe.Increasingly,embeddedvaluesaredisclosedin
supplementaryfinancialstatements,butaregenerallynotincludedinbalancesheetsshownin
theprimaryfinancialstatements.S&PGlobalRatingswillcreditupto50%ofvalueinforce(VIF)in
itscalculationofTAC.Adjustmentswillbemadetoavoidanydoublecountingofthecreditgiven
onbalancesheetforVIF,deferredacquisitioncosts(DAC),valueofbusinessacquired(VOBA),and
goodwill.
48. Whereembeddedvalueinformationisnotavailable,wemayincludeupto50%ofthevalueoflife
DAC,ifweconsideritreasonabletoassumethosecostswillberecoveredevenunderstressed
scenarios.WemayapplyfurtheradjustmentstoexcludemoreoftheDACifwebelievethe
companyassumptionsarenotsufficientlyconservative.Insomeregions,otherproxiesmaybe
availableforVIFandwouldbeconsideredinouranalysis,ifappropriate.
Property/casualtydeferredacquisitioncosts
49. Wededuct100%ofP/CDACwhencalculatingTAC.InjurisdictionswhereP/Ccontractscanhave
long-termfeaturesakintolifeinsuranceproducts,partialcreditmaybegivenforDACassets
arisingfromthosecontracts.
P/Clossreservedeficits/surpluses
50. WhereS&PGlobalRatingsdeterminesthatacompany'slossreservesareeitherdeficientorin
surplus(byourownreserveanalysis,externalactuarialreview,orothermeans),wewilladjustTAC
accordingly.ForthepurposesofTAC,surplusesarenormallyhaircutby50%.Thereisnodouble
countingofcreditsforlossreservesurplusesandprudentialmarginsinreserves.(Formore
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details,pleasesee"AssessingProperty/CasualtyInsurers’LossReserves,"Nov.26,2013.)
51. ForthepurposesofcalculatingexpectedcapitalneedsforP/Clossreserves,andthediscount
calculationbelow,weadjustreservestoalevelconsistentwiththeTACmeasurement.Thisavoids
removingtheincentiveforcompaniestoreserveconservatively.
DiscountonP/Clossreserves
52. TACisadjustedtoeliminateanyexplicitorimplicitdiscountofP/Clossreserves.S&PGlobal
Ratingsthencalculatesitsownestimateofthetimevalueofmoney,basedonthenon-lifereserve
durationandtherelevant10-yeargovernmentbondyield.Weuseaweighted-averagefor
companieswithreservesdenominatedinmorethanonecurrency.
53. Asamatterofprudence,S&PGlobalRatingshaschosentohaircutthelossreservediscountby
33%.Thediscountcalculationisappliedtolossreservesafteranyadjustmentsfor
deficits/surpluses.
Discountedunearnedpremiumreserve
54. S&PGlobalRatingsdeducts100%ofnon-lifedeferredacquisitioncostswhenitcalculatesTAC.
However,werecognizethatvaluewillnormallybeembeddedintheunearnedpremiumreserve
(UPR).Werecognizethisvaluebygivingpartialcreditforthetimevalueoftheunearnedpremium
reserve.TACisadjustedtoreflectthediscountedvalueoftheUPR,basedonthecompany's
reserveduration(subjecttoatwo-yearmaximum)andtherelevant10-yeargovernmentbondyield
(oraweighted-averageforcompanieswithreservesdenominatedinmorethanonecurrency).
55. Weapplya50%haircuttocaptureanallowanceforexpenses,taxes,andgeneralconservatism
overthetimingoffutureclaims.Wewillcontinuetoreflectpricingriskelsewhereinthemodel
throughourpremiumcharges.
Policyholdercapitalavailabletoabsorblosses
56. CertainformsofpolicyholdercapitalmaybeincludedinTACiftheyareavailabletoabsorblosses
(notablyinvestmentlosses)acrosstheorganization.Thiscouldincludetheunallocateddivisible
surplusintheU.K.andfreeRückstellungfürBeitragsrückerstattung(RfB)inGermany.
Policyholdercapitalisgenerallyexcludedfromthehybridequityratio,withthenotableexception
ofmutuals.
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Deferredtax
57. Usually,noroutineadjustmentsaremadeforon-balance-sheetdeferredtaxassetsandliabilities,
althoughwemaymakeadjustmentswhereassetrecoverabilityisquestionableordistant.All
adjustmentstoTACthatwouldresultinataxchargeorcreditareadjustedforthetaximpact.This
typicallyappliestothevalueofoff-balance-sheetlifeinsuranceinforce,off-balance-sheet
pensionadjustments,unrealizedinvestmentgains,anddeferredacquisitioncosts.Intheabsence
ofdisclosedtaxeffects,adjustmentsaremadeusingtheeffectivetaxratedeterminedfromthe
incomestatement.
Subsidiaries,associates,andotheraffiliates
58. Unconsolidatedinvestmentsinsubsidiariesaresubjecttoa100%capitalcharge.Thisrecognizes
thattheassetandliabilityrisksassociatedwithsuchsubsidiariesarenotconsolidatedinthe
reportedfinancialsand,therefore,thecapitalmodel.The100%capitalchargeassumesthatthe
subsidiaryhassufficientcapitaltomeetitsrequirements.Ifthesubsidiaryismaterial,the
companyshouldeitherbeconsolidatedintothegroupcapitalmodelorastand-aloneanalysis
shouldbeperformed.The100%capitalchargeisthenadjustedupordownforanyredundancyor
deficiencyofcapitalresourcesrelativetorequirements,withappropriateconsiderationofany
capitalfungibilityconstraints.
59. S&PGlobalRatingsmaygivepartialcreditwherethebookvalueoflistedaffiliatesisunderstated
relativetotheirmarketvalue.Weapplyhaircutstotheexcessofmarketoverbookvalueofcoreor
strategicallyimportantaffiliatesbecause,inourview,theseholdingsareunlikelytobefully
realizedandalsotorecognizethepotentialliquidityrisks.Wewillrecognizefullvalueforthe
excessofmarketoverbookvalueoflistednonstrategicaffiliates,subjecttoastandard27%
equityvolatilitycharge.Wewilladjustupwardthebasechargeof27%iftheseinvestmentsare
materialordomiciledinhigher-riskequitymarkets.
LeverageAnalysis
Qualityofcapital
Paragraphs60–64havebeendeleted.
Hybridcapital
65. Adetaileddescriptionofhybridcapitalisgivenin"HybridCapital:MethodologyAnd
Assumptions,"publishedonJuly1,2019.
66. S&PGlobalRatingsemploysasimplemethodologyforanalyzinghybridsecuritiesthatparallels
theregulatoryapproach,classifyinghybridsintothreecategoriestoreflecttheirrelativedegreeof
equitystrength.Thelimitsforinclusionbycategorybroadlyparalleltheregulatorypolicyof
cappingtheinclusionofhybridsinregulatorycapital,andallowforglobalcomparisonsofcapital
measures.
[Table2hasbeendeleted.]
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