Response to Industry Comments - Eligible Capital Rules 2010 (2011-11-22)

Summary

This is a letter from the Bermuda Monetary Authority responding to industry comments received on the draft Eligible Capital Rules 2010. It clarifies how the Authority will treat several specific capital instruments and issues for purposes of the Insurance Code's tier 1, tier 2 and tier 3 capital classifications, and confirms the timeline for a revised version of the Rules.

• Collateral and statutory surplus: Collateral posted to ceding companies that is freely available to all policyholders will not be deducted from statutory surplus when calculating tier 1 capital.
• Subordinated debt maturity: The Authority rejected the request to treat non-redeemable subordinated debt as tier 1 capital regardless of stated maturity; a stated maturity of 10 years or longer is required, though non-conforming instruments may still be approved case-by-case.
• Incentive to redeem: Instruments with an incentive to redeem (e.g. step-up coupons combined with a call option) are classified as tier 3 eligible capital.
• Letters of credit and trust assets: Letters of credit and trust account assets supporting surety, workers compensation, reinsured losses, reinsureds' obligations, or Lloyds operations are generally treated as encumbered assets and deducted from tier 1 capital; companies are encouraged to seek an Authority determination for specific instruments, including junior subordinated trust preferred debt.
• Pooled guarantees: Where a potential obligation under a pooled guarantee is unknown, the liability should be recorded at the present value of the amount expected to be drawn down (discounted using a rate disclosed to the Authority), or at the full obligation amount if discounting is not feasible.
• Grandfathering of hybrid instruments: Prior grandfathering arrangements for the tier 1 treatment of hybrid capital instruments will continue to be assessed case-by-case.

A revised version of the Eligible Capital Rules was posted on 14 November 2011 and is set to take effect on 31 December 2011, with the Authority inviting any further industry comments by 13 December 2011.

Key obligations

• Subordinated debt must have a stated maturity of 10 years or longer to qualify as tier 1 capital, absent case-by-case Authority approval of a non-conforming instrument.
• Instruments carrying an incentive to redeem must be classified as tier 3 eligible capital.
• Companies should seek an Authority determination for the appropriate capital tier of letters of credit, trust account assets, and junior subordinated trust preferred debt instruments.
• Liabilities for pooled guarantees with unknown potential obligations must be recorded at the present value of the expected drawdown amount (or the full obligation amount if discounting is not feasible), using a discount rate disclosed to the Authority.
• Any additional comments on the revised Eligible Capital Rules must be submitted to the Authority by 13 December 2011.

Applies to

insurers

Deadlines

• 14th November, 2011: Revised version of the Eligible Capital Rules posted.
• 31st December, 2011: Revised Eligible Capital Rules take effect.
• 13th December, 2011: Deadline for submitting additional comments on the revised Rules.