A.M. Best s Rating Approach. Anthony Diodato Group Vice President - North American Property & Casualty

Transcription

1 A.M. Best s Rating Approach Anthony Diodato Group Vice President - North American Property & Casualty

2 Disclaimer AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.

3 Introduction to A.M. Best

4 A.M. Best Overview Established in 1899 in the US, pioneered the concept of insurer financial strength ratings in 1906 Provider of ratings, financial data and news relating to insurance industry Coverage of approximately 3,500 companies in >70 countries Awarded Best Global Rating Agency at the Reactions Global Awards 2009, 2010, 2011and 2012 Only international rating agency focused on the insurance industry: Methodologies are specific to the insurance industry Analysts are insurance specialists and only analyse insurance companies Ability to provide specific indications as to the main drivers of a rating grounded in industry knowledge

5 Global Coverage (Re)insurers FSRs 4,000 3,500 3,000 2,500 2,000 1,500 1, A.M. Best S&P Fitch Moody's Source: NRSRO Web sites and AM Best as of July 2012 Note: Data does not include PD ratings, NR ratings, National ratings with local scales or companies who are under regulatory supervision or in liquidation.

6 Companies by Rating Company FSR Country CRT Mapfre Tepeyac S.A. A- Mexico CRT-3 Seguros Inbursa A- Mexico CRT-3 Afianzadora Insurgentes, SA de CV A- Mexico CRT-3 Grupo Nacional Provincial S.A.B. A- Mexico CRT-3 Reaseguradora Patria, S.A.B. A- Mexico CRT-3 Afianzadora Aserta, S.A. de C.V. A- Mexico CRT-3 Qualitas Compania de Seg S.A.B. de C.V. B- Mexico CRT-3 IRB - Brasil Resseguros S.A. A- Brazil CRT-3 Instituto Nacional de Seguros A- Costa Rica CRT-4 ASSA Compania de Seguros, S.A. A Panama CRT-4 Compania Internacional de Seguros SA A Panama CRT-4 Mapfre Panama S.A. A- Panama CRT-4 Barents Re A- Panama CRT-4 Del Istmo Assurance Corp A- Panama CRT-4 QBE del Istmo Reinsurance Inc. A- Panama CRT-4 Aseguradora Ancon SA A- Panama CRT-4 Colonial SA Compania Seguros B++ Dominican Republic CRT-5

7 The Rating Opinion

8 AM Best Financial Strength Rating (FSR) An independent opinion of an insurer s financial strength and ability to meet its on-going insurance obligations based on a comprehensive quantitative and qualitative evaluation Forward looking in nature Value depends upon the market credibility of the rating issuer Supported by impairment studies Relates to a legal entity not a group Not a warranty of a company s financial strength

9 Other Types of A.M. Best Ratings Issuer Credit Rating (ICR) an independent opinion of an issuer s ability to meet its ongoing senior financial obligations Debt Rating (DR) an independent opinion of an issuer s ability to meet its ongoing financial obligations to security holders when due Insurance Linked Securities (ILS) ratings an independent opinion of an issuer s ability to meet its ongoing financial obligations to security holders when due

10 A.M. Best Rating Scales Secure FSR A++ A+ A ICR aaa aa+ aa aaa+ a A- a- B++ bbb+ bbb B+ bbb- Investment Grade Vulnerable FSR B B- C++ ICR bb+ bb b+ b C+ b- C C- bb- ccc+ ccc ccccc Non-Investment Grade D c FSR = Financial Strength Rating ICR = Issuer Credit Rating E = under regulatory supervision F = in liquidation

11 A.M. Best Rating Indicators Rating outlooks Assigned with every rating Indication of potential direction over an intermediate term, generally defined as 12 to 36 months Positive Stable Negative Under review Typically associated with a pending transaction or other significant event that causes AM best to re-evaluate rating Short-term in nature typically, a rating is under review no longer than 6 months Positive Developing Negative

12 Historical Impairment Probabilities Class of Credit Ratings: Insurance Companies (Financial Strength Ratings) 3-Year Ratings Transition FSR Impaired Total Impairment Rate A % A % A % A % B % B % B % B % C % C % C % C % D % Total: %

13 Country Risk

14 Country Risk vs. Sovereign Risk Country Risk - The risk that country-specific factors could adversely affect an insurer s ability to meet its financial obligations Sovereign Risk - The risk that a sovereign government does not pay back its debts on time and in their entirety

15 Country Risk The risk that country-specific factors could adversely affect an insurer s ability to pay its financial obligations Economic Risk Macroeconomy Prospects Government Finance Business Environment CRT-1 Lowest Risk Political Risk Financial System Risk Non-Insurance Insurance Government Stability Social Stability Legal System Banking System Reporting Standards & Regulation Sovereign Debt Government & Legislation Supervisory Authority Insurer Accountability CRT-3 Moderate Risk CRT-5 Highest Risk

16 Country Risk Impact Poor asset choices Burdensome regulation Inefficient legal system Poor business infrastructure Challenges unique to the country s operating environment and must be explicitly addressed Inadequate data High vulnerability to financial crisis Inadequate regulation Opacity in Legal System Societal Instability & Violence Government Corruption Weak economic structure High risk to financial strength without extraordinary preparation (capital) Potential to be completely destabilizing for any company (Most companies would be in the vulnerable range.)

17 Ratings and CRTs AMB s Country Risk Tiers do not impose ratings ceiling FSR A++ A+ A A- B++ B+ B B- C++

18 Reasons Why Companies Request a Rating

19 The Growing Importance of Credit Quality Growing awareness of credit quality Raised general level of awareness of credit quality across both consumer and commercial sectors Focus on counterparty credit Sharpened focus on counterparty credit will continue to embed ratings in the financial fabric of the insurance and reinsurance sectors Ratings becoming enshrined in legislation Ratings are increasingly becoming enshrined in insurance legislation around the world as regulatory regimes evolve and their sophistication increases

20 The Growing Importance of Credit Quality Enhanced insurance regulation, in particular more sophisticated solvency requirements Need for statement of credibility ( passport ) when expanding regionally/internationally Entry to, and development of, credit sensitive market segments, e.g., reinsurance, large commercial business Due-diligence requirements on cross-border mergers, JVs, etc. Increasing involvement of major brokers Facilitates capital raising and reinsurance purchase Drive to improve corporate governance practices

21 The Rating Process

22 What Kind of Information Will Be Required? Public Financial Statements Shareholder/Policyholder Reports Statutory Filings & Offerings Audit Reports Regulatory Filings Company Supplied Management Meetings with CEO, COO, CFO, CUO, CIO Business Plans/Projections Best s Supplemental Rating Questionnaire (SRQ) Actuarial Memorandums Loss Reserve Reports Cash Flow Testing Capital Structure and Plans Investment and Credit Guidelines Reinsurance Guidelines Catastrophe Exposures Enterprise Risk Management Metrics Internal Capital Models

23 The Management Meeting Agenda CEO Strategic Overview Corporate Governance Organisational Structure Capital Structure Underwriting Claims & Loss Reserving Reinsurance Programs Investments Financial Review & Planning Enterprise Risk Management Marketing & Business Production

24 Best s Rating Process Interactive, ongoing review of company fundamentals Review includes wide variety of both quantitative and qualitative information Primary Credit Analyst primary relationship manager Team Leader provides guidance and support to the Primary Analyst Rating Committee (RC) Members include team leaders and rating division management RC reviews all rating actions RC employs analytical guidelines, policy and procedures established by Credit Rating Policy Committee (CRPC)

25 Ratings Methodology INSURANCE COMPANY FINANCIAL STRENGTH Balance Sheet Strength Operating Performance Business Profile Enterprise Risk Management Rating

26 Bringing it all Together Balance sheet strength is most important Sustained, stable operating profitability ensures future strength Well-diversified, strong business profile ensures stability and profitability Management depth, experience and stability influences these areas Risk Management links strategy to factors above

27 Enterprise Risk Management Risk management is the common thread that links Balance sheet strength Operating performance Business profile Risk management fundamentals can be found in a company s Strategic decision making process Financial management and control practices Daily operating procedures

28 Best s Capital Adequacy Model (BCAR)

29 Best s Capital Model (BCAR) Standard for evaluating capitalization Model evolves over time Dynamic factor-based model Minimum capital level guidelines Trends are key

30 A.M. Best Rating Components Balance Sheet Strength BCAR Guideline Strong Operating Performance Builds Balance Sheet Strength Business Profile Drives Strong & Sustainable Operating Performance Weak Operating Performance Erodes Balance Sheet Strength Date of last balance sheet Present Time Future

31 Thank you