Risk-based capital adequacy still remains only one of many factors used in arriving at a credit rating. "Our rating process will continue to be based on the belief that capital-adequacy analysis is not a substitute for a broad-based analysis of insurer credit quality," the report said.

Companies that have the capacity to generate capital organically from earnings will gain favor in the S&P analysis. "During the 2001-2003 period several insurers raised capital at a deep discount to their already deflated market values," the report stated. "This demonstrated a weakened financial flexibility profile and had an adverse impact on ratings, despite the maintenance of overall capital adequacy."

As for unfunded defined benefit pension obligations, S&P will deduct them from total adjusted capital. "These unfunded liabilities are viewed as debt-like in nature given that these are financial obligations that will ultimately be funded from future cash flows," the report noted.

Mr. Puccia said the agency will solicit feedback from insurance companies on the proposed revisions over a three-month period after the complete article is published in July.

The model will be finalized by the end of this year and will run simultaneously next year with the current model. "As we gain more confidence in the revised capital-modeling indications, greater reliance will be placed on it for analytical purposes," he said.