A.M. Best releases contingent capital facility rating methodology

A.M. Best has developed a methodology for rating contingent capital facilities used by insurers.Contingent capital facilities allow companies to preset the terms and conditions of future capital-raising initiatives, allowing financial flexibility for organizations while protecting balance sheets against the unexpected, A.M. Best explains. Considering the recent interest in contingent capital, A.M. Best has determined which provisions likely would warrant credit in Best’s Capital Adequacy Ratio (BCAR). The BCAR measures risk-adjusted capital available to meet policyholder obligations, a release says.”Generally, more credit is given to fully funded facilities, where the special-purpose vehicle holds highly rated, liquid securities that the sponsor can access on short notice,” it continues.”A.M. Best also looks favourably on facilities that require put options to be exercised when certain events occur, such as catastrophe loss (i.e. natural, man-made or pandemic).”If the put option rests with the holding company, credit is given if the holding company is obligated contractually to downstream the funds to its insurance operating subsidiary, A.M. Best says.In cases where the put option involves a hybrid issuance at the operating company level, the maximum available credit would be 90%. This could reach 100% if the facility involves the issuance of equity securities.