A.M. Best Europe Rating Services Limited

Transcription

1 A.M. Best Europe Rating Services Limited European Union Transparency Report 1

2 Contents AMBERS European Union Transparency Report... 3 Introduction... 3 AMBERS and its Role in the Market... 4 How Credit Ratings are decided upon... 5 Management Structure... 6 Board of Directors... 6 Chief Executive Officer... 7 Compliance... 7 Cross Jurisdictional Management Support Functions... 7 Credit Rating Policy Committee... 7 Risk Assessment Committee... 7 Professional Code of Conduct... 8 Policies and Procedures... 8 The Management of Conflicts of Interest... 8 Rating Committee Composition... 9 Monitoring of Ratings... 9 Performance of Credit Ratings AMBERS Staff Allocation (as at 30/9/11) Record Keeping Policy Annual Compliance Review Revenue of AMBERS for the period September Governance Statement Largest Clients by Revenue Legal Structure

3 AMBERS European Union Transparency Report This report is provided in accordance with Regulation (EC) 1060/2009 as amended by Regulation (EU) 513/2011, Annex 1 Section E and relates to the period of January 1 st 2011 to December 31 st Introduction The AM Best Group has been producing credit ratings and opinions on the insurance market for over 100 years. The Group has expanded its geographical coverage from its principal markets of the United States to cover the Americas, Europe, Middle East, Africa, Russia and the Asia-Pacific region. Currently the Group has 3 main offices, Oldwick, London and Hong Kong. As a Group it has registrations as a Credit Rating Agency in: The USA (AMB Inc) The EU (AMBERS) Hong Kong (AMBAP) New Zealand (AMBAP) Australia (AMBAP) The Group is renowned for its experience and knowledge of the Insurance Sector and currently provides ratings to over 3800 entities in that market space. This transparency report is the first such report provided by AM Best Europe Rating Services Limited hereafter known as AMBERS and covers the 12 month period from 1 st January 2011 to the 31 st December The company submitted its application for registration as a Credit Rating Agency in the European Union in September 2010 and was subsequently registered a year later on the 7 th September 2011 by the European Securities and Markets Authority (ESMA) as a credit rating agency under the applicable European legislation. Prior to the submission of the application, the existing European entity AM Best Europe Ltd contained two major lines of business, a ratings division and a provider of information products and news services. At that time, the single business employed around a total of 65 staff. The impact of the European Credit Rating Agency legislation drew a distinction between what was considered to be credit rating activities and the provision of those other services. Consequently a decision was taken to split the business into its two natural parts through the creation of two sister companies, AMBERS and AM Best Europe - Information Services Ltd (AMBEIS). 3

4 At the time of the formation of the two new entities there were approximately 39 people in AMBERS and 26 in AMBEIS. These numbers have fluctuated through the turnover of staff in each entity but remain largely stable in terms of overall size and split. The two businesses share a common office location in the City of London. AMBERS provides support to AMBEIS through the management structure and essential support services such as finance, human resources and compliance. AMBEIS provides dedicated support to AMBERS in terms of IT personnel and system support. The Group is acutely aware of the overall general lack of confidence that was felt about Credit Rating Agencies following the financial crisis of 2008 and therefore welcomes the European and Global regulatory initiatives which it views as having a positive effect in going some way to restore the confidence and strength in the overall financial markets and system. The Group is committed to working with regulators and legislators across the Globe to bring about a positive change in the public s perception of Credit Rating Agencies. The Group recognises that the changes will be ongoing and will evolve to reflect the moods and needs of the market; however the AM Best Group will seek to be at the forefront of the change so that its 100 years of experience will be seen as a beacon of reliability well into the current century and beyond. AMBERS and its Role in the Market The credit ratings issued by the AM Best Group are independent opinions regarding the creditworthiness of an obligor, issuer or a debt obligation; the ratings are based on a comprehensive quantitative and qualitative evaluation of a company s balance sheet strength, operating performance and business profile, or where appropriate the specific nature and details of a debt security. The Group, in line with the other credit rating agencies, makes this information freely available to the public. In this way the amount of information about the companies and entities being assessed will increase and gives the users of credit ratings the opportunity to make a more informed choice in their decisions. The Group, in common with most of the other rating agencies, operates on a issuer pays model which allows the public to gain free access to the opinions being published, AM Best believes that the advantages of allowing the opinions to be freely available provides the market with greater advantages than alternative business models. The credit rating opinions are forward looking rather than a backwards verification of the facts, however as they are projections as to the future they are necessarily opinions rather than hard facts and certainties as the future cannot be predicted in a definitive manner. Best s credit ratings are assigned using a 4

5 number of simple, straight-forward scales, with each scale representing a rank ordering of our opinion of insurer, issuer or financial obligation creditworthiness. For example, insurers that are assigned higher credit ratings are deemed to be less likely, in our opinion, to become financially impaired than insurers that are assigned lower credit ratings. While ratings reflect our opinions of relative creditworthiness at the time they are assigned, they are not indicators or predictors of defined impairment or default probabilities with respect to any specific insurer, issuer or financial obligation. The ratings themselves are just one opinion of relative credit risk and the investing public and users of ratings should consider the rating assigned to the entity alongside other information in order to reach an informed opinion. The Group assigns three types of ratings: Financial Strength Ratings an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. This rating is assigned to Insurance Companies. Issuer Credit Ratings an independent opinion of an issuer or entities ability to meet its ongoing senior financial obligations. This rating is assigned to the insurance companies and the related holding companies as well as other legal entities who are authorised to issue financial obligations. Debt Ratings an independent opinion of an issuer s ability to meet its ongoing financial obligations to security holders when due. This rating is assigned to the debt securities and index linked securities transactions of entities rated by the Group. The credit ratings are not a warranty, nor are they a recommendation to buy, sell, hold or trade any securities or insurance related products. They do not address the suitability of any particular financial obligation for specific purposes or for potential purchasers. How Credit Ratings are decided upon Credit ratings usually begin with an analyst, known as the Lead Analyst being appointed as the primary contact with the entity. It is the Lead Analyst s responsibility to collate the data from the company and other relevant sources into a pack and present this information to a group of appropriately experienced rating analysts for discussion. This discussion takes place in what is known as a Rating Committee. The purpose of the Rating Committee is to take the information presented to it by the Lead Analyst and robustly discuss and dissect the material by challenging, where appropriate, the preliminary findings. The discussions take place under the direction of a Chair, who will typically be one of the more senior and experienced analysts within the company. Once the 5

6 discussions and debating has concluded the committee will vote on the proposals and as a committee will rely on the majority vote to determine the outcome and recommendation of the rating to be assigned. It is important to note that the decision of the committee is the opinion reached and not that of the individual analyst. Even though an analyst may have voted for a different outcome, it is the majority vote of the committee which will become the opinion of the Group. Management Structure The over-riding philosophy of the Group is that credit ratings should be at all times be consistent and not be subject to geographical variations and free from conflicts of interests. In this way both the rated entities and the users of the ratings can refer to a common scale and make direct comparisons across any particular ratings band. AMBERS is a separate legal entity registered in the United Kingdom subject to the European laws on Credit Rating Agencies but as part of the AM Best Group it shares common values, methodologies and processes to present credit rating opinions that are instantly recognisable as being from the AM Best brand. The management of AMBERS has been established with a design and approach that reflects the global, regional and national characteristics of the business so that many of the roles and responsibilities seen in the parent company are reflected in AMBERS and other sister companies within the Group. Board of Directors The Directors of AMBERS comprise the three Executive Board Directors of AM Best Inc together with the CEO of AMBERS: between them they have many years of experience gained within the Group and the insurance market. The Directors are: Chairman, Arthur Snyder III Director, Paul Tinnirello Director, Larry Mayewski Director and CEO of AMBERS, Roger Sellek The composition of the board facilitates the two-way flow of information between the US parent company and the AMBERS subsidiary which in turn ensures that the Group can achieve a consistency of approach whilst being cognisant of developing trends and specific issues in the regional and national markets. AMBERS was granted the exemption from the need to have any independent non-executive directors due to its overall size of fewer than 50 employees. 6

7 Chief Executive Officer The CEO has the day to day responsibility for managing the operations of the business in AMBERS and also the managerial oversight of the wholly owned sister operation in the Asia Pacific region, AM Best Asia Pacific Ltd. This dual role is critical to maintain the business flow between the Head Office and the subsidiaries and helps ensure the consistency of approach throughout the Group. Compliance The Compliance Officer for AMBERS is independent of the business management and reports to the CEO and the Board. Compliance is run as an integrated function across the Group; globally the function is responsible for overseeing the policies and procedures and adherence to the regulations. The Board receives regular reports from the Compliance Officer who attends the Board meetings to allow the Directors to ask specific questions on any compliance related matters. Cross Jurisdictional Management Support Functions To achieve the goal of consistency the Group looks to utilise centralised functions wherever it is practicable to do so. The relatively small size of the operation in London means the business is focussed on delivering the ratings to its customers. The Group has centralised the function which is responsible for producing the methodologies and models. Credit Rating Policy Committee The credit rating policy committee (CRPC) is the global function which is responsible for the production and maintenance of the models and methodologies used by the analysts in the determination of ratings. Under the terms of reference of the CRPC the models and methodologies are subject to a continuous assessment and review process which the company believes allows the models and methodologies to be used in the ratings process with the highest degree of confidence. The models and methodologies used in the sector have been developed and refined over a long period of time which gives the market confidence in the reliability of the rating process Risk Assessment Committee The Group has set up a global Risk Assessment Committee to continuously review the risks faced by the Company in terms of the outright or naked exposure and then to reassess the resultant risks once the quality and appropriateness of the various stages and types of control have been applied. By looking at the individual risks at a very detailed level it allows the Group to build up an accurate heat map of the risks associated with each of its business processes and thus fine tune the controls so that the Directors and Senior 7

8 Managers are comfortable with the overall risks in the business. This form of interactive risk assessment methodology provides the Group with a template that can be applied to new scenarios and business processes. Professional Code of Conduct The Group operates a single professional Code of Conduct based on the IOSCO code of conduct. The Code sets out the principles under which all Directors, Senior Managers and Employees are expected to operate. The Code is regularly reviewed to take account of changes in legislation on a global basis. Policies and Procedures The Code of Professional Conduct is viewed as the high level standards and principles under which the company operates the business; the policies and procedures are the detailed interpretation of the laws, rules and regulations which govern the ways in which the business will carry out those tasks. The policies and procedures, when taken together with the Code of Conduct, provide the basis of the operating manual for the company. The Management of Conflicts of Interest AMBERS operates an issuer pays model in respect of the ratings process, this method is the most common way in which fees are collected in turn for providing ratings. The other, major recognised model is termed investor pays which is where the general investors or users of the ratings pay a subscription to access the data on companies. It is the Group s belief that whilst both methods have an inherent potential conflict of interest risk, the issuer pays model is the better method for making sure that the maximum exposure is given to any specific rating. AMBERS has instigated a number of processes to manage the conflicts of interest, these include: The adoption of the Code of Conduct based on the IOSCO principles, the code is regularly updated to keep it current and address evolving risks. The adoption of policies and procedures which address and manage the conflicts of interest. Every quarter staff sign to affirm that they are aware of the details contained within the code of conduct and that they follow the policies and procedures, particularly with respect to gifts and entertainment, securities trading and ownership and other situations that may arise that could cause a real or apparent conflict of interest. The business model operated by AMBERS separates the commercial aspects of providing a rating from the analytical process. The Code of Conduct expressly prohibits the analytical staff from any knowledge of the commercial terms between the company and a rated entity. The analytical staff of AMBERS are physically separated from all other staff. 8

9 AMBERS only provides ratings services to its clients and customers and does not operate any ancillary or other business which raises revenue from its clients and customers. The rating process ensures that any potential conflicts of interest are declared at the outset of the ratings determination and analysts declare whether or not they have any potential conflicts of interest before joining in any rating determination. The rating decision reached is that of a committee rather than the judgment of any single individual. When an analyst leaves the employ of the Group to work for a rated entity a look-back review is instigated to make sure that the analyst did not exert any undue influence on the decision of the rating committee of that entity. AMBERS has been granted an exemption from the need to adopt a statutory analyst rotation policy however under the internal guidelines the Group has its own rotation policy. The compensation for analysts does not contain any element for the retention or acquisition of business. The staff appraisal process upon which the salary reviews are based is designed to look at the qualitative work from an analytical perspective and specifically excludes elements considered to be of a commercial nature. The Compliance Officer actively monitors the potential and actual conflicts of interest that may occur within the business and reports his findings to the AMBERS Board on a quarterly basis. Rating Committee Composition The location of the lead analyst determines the location for any particular rating. The location and or domicile of the rated entity do not have a bearing on the location of the rating. The lead analyst is responsible for the preparation of the information pack that will be considered by the Rating Committee, the Group views the committee process as essential in providing high quality, consistent ratings which have credibility with the users, both from the perspective of the issuers and the end users of the ratings. The Group has detailed policies and procedures for the composition and operation of the committees. Monitoring of Ratings Once a rating has been issued by AMBERS it is the responsibility of the Lead Analyst to maintain familiarity with the rated entity and to make sure that the rating is formally reviewed at a minimum of at least annually. 9

10 Performance of Credit Ratings AMBERS parent company, domiciled in the United States, maintains a general impairment database and historical rating records from which long-term impairment rate and one-year rating transition studies are performed annually aimed at estimating default risk of insurers that have had interactive Best s Financial Strength Ratings. While these studies have historically only covered U.S. domiciled insurers, AMBERS management believes the results are applicable to its rated population given the consistent global application of rating criteria. For purposes of its long-term impairment rate and one-year rating transition studies, A.M. Best designates an insurer as a Financially Impaired Company (FIC) upon the first official regulatory action taken by an insurance department, whereby the insurer s: Ability to conduct normal insurance operations is adversely affected; and /or Capital and surplus have been deemed inadequate to meet legal requirements; and/or General financial condition has triggered regulatory concern. The definition of financial impairment is different from that of issuer defaults generally used in the credit markets. The credit markets broadly deem an issuer default as having occurred when an issuer misses interest or principal payments on its obligations; restructures its debt in a way that is deleterious to investors; or files for bankruptcy. Financial impairment of insurance companies, by contrast, often occurs even if an insurance company has not formally been declared insolvent. For instance, an FIC s capital and surplus could have been deemed inadequate to meet risk-based capital requirements, or there might have been regulatory concern regarding its general financial condition. Thus, at any given rating level, more insurers would be impaired, according to the above definition, than actually would default in full or in part on policyholder obligations. 10

11 AMBERS Staff Allocation (as at 31/12/11) The table below lists only those staff employed by AMBERS Ltd as at the 3 1st December AMBERS Ltd Number Ratings Analysts 19 Credit Ratings Support Staff 14 Senior Management 5 The CRPC Function is based wholly in the United States Office. Record Keeping Policy The record keeping requirements for AMBERS as governed by the global record keeping and retention policy, the purpose of having a centrally administered policy is to allow the Group to present a single standard which is understood by all staff. The policy classifies the documents according to whether the documents themselves are central to the procedures and determinations of rating decisions, refer to the commercial relationships with our clients and customers, or are documents that the Group keeps to satisfy its legal and regulatory obligations. The details of the record keeping policy can be found at Annual Compliance Review The annual compliance review for AMBERS covered the period from 14 th February 2011 thorough to 31 st December The start date was chosen as the London Compliance Officer commenced his duties with AMBERS on that date. The Compliance Function operates independently of the business lines and found that the key processes used within the ratings process were robust. A number of enhancements were recommended for discussion with the AMBERS Board of Directors and it is anticipated that these will be actioned throughout Revenue of AMBERS for the period September AMBERS does not provide any services to its clients other than the production of credit rating opinions. In the 12 month period ending on the 31 st December 2011 the revenue was 100% attributable to rating activities. Governance Statement AMBERS was granted an exemption from the need to have Independent Members on its Board of Directors. 11

12 The Composition of the Board of AM Best Europe Rating Services Ltd is as follows: Arthur Snyder, III, Chairman Paul Tinnirello, Director Larry Mayewski, Director Roger Sellek, Director and CEO The Directors of AMBERS comprise the three Executive Board Directors of AM Best Inc together with the CEO of AMBERS; between them they have many years of experience gained within the Group and the insurance market. The exemption from the need to have independent Directors on the Board of AMBERS has transferred the requirements of Annex 1, Section A, of the legislation to the existing Directors. The key elements of Section A (the Governance schedule) are as follows: That credit rating activities are independent and free from political, economic influences and constraints That conflicts of interest are properly identified, managed and disclosed That the business is organised in a way that ensures its business interest does not impair the accuracy of the credit ratings That the Senior Managers are of good repute and sufficiently skilled and experienced That the business has adequate policies and procedures to ensure compliance with the regulations That the business has: o Sound administrative and accounting procedures o Internal control mechanisms o Effective procedures for risk assessment o Effective control and safeguards for IT systems That the business has implemented and maintained decision making procedures and organisational structures which are clear and document specific reporting lines and allocate functions and responsibilities That the business appoints and maintains an independent compliance function who reports regularly to the Board and Senior Management That the business will monitor and evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements and take appropriate measures to address any shortfalls 12

13 The tasks which have devolved from the Independent Directors to the Board include: Monitoring the development of the credit rating policy and of the methodologies used in the ratings process Monitoring the effectiveness of the internal quality control system in relation to the credit rating activities Monitoring the effectiveness of the measures and procedures to ensure the proper management of potential and actual conflicts of interest Monitoring the compliance and governance processes, including the efficiency of the review function Largest Clients by Revenue The following table includes the 20 largest clients by revenue for AMBERS during the period of the 1 st January 2011 to 31 st December 2011, listed in alphabetical order. 13 Largest Clients by Revenue Allianz Societas Europea Amlin Bermuda Ltd Assiicurazioni Generalli spa Aviva International Insurance Ltd Brit Insurance Ltd Cardif Assurance Vie Catlin Insurance Company Ltd Delvag Luftfahrtversicherungs AG Gulf Insurance Company (KSC) Hiscox Insurance Company (Bermuda) Ltd Lloyd s of London Munich Reinsurance Company Omega Speciality Insurance Company Ltd Paris Re Royal & Sun Alliance Insurance Plc SALAMA Islamic Arab Insurance Company psc SCOR S.E Swiss Reinsurance Company Ltd Tapiola General Mutual Insurance Co Torus Insurance (UK) Ltd

14 Legal Structure AMBERS is a wholly owned subsidiary of AM Best Inc a privately held company registered in New Jersey, USA. END 14