A.M. Best s Rating Approach Anthony Diodato Group Vice President - North American Property & Casualty
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Introduction to A.M. Best
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
Global Coverage (Re)insurers FSRs 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 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.
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
The Rating Opinion
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
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
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
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
Historical Impairment Probabilities Class of Credit Ratings: Insurance Companies (Financial Strength Ratings) 3-Year Ratings Transition FSR Impaired Total Impairment Rate A++ 0 107 0.00% A+ 0 544 0.00% A 0 1055 0.00% A- 2 899 0.22% B++ 3 290 1.03% B+ 0 183 0.00% B 1 68 1.47% B- 4 33 12.12% C++ 2 11 18.18% C+ 2 5 40.00% C 0 1 0.00% C- 0 1 0.00% D 1 1 100.00% Total: 15 3198 0.47%
Country Risk
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
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
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.)
Ratings and CRTs AMB s Country Risk Tiers do not impose ratings ceiling FSR A++ A+ A A- B++ B+ B B- C++
Reasons Why Companies Request a Rating
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
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
The Rating Process
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
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
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)
Ratings Methodology INSURANCE COMPANY FINANCIAL STRENGTH Balance Sheet Strength Operating Performance Business Profile Enterprise Risk Management Rating
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
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
Best s Capital Adequacy Model (BCAR)
Best s Capital Model (BCAR) Standard for evaluating capitalization Model evolves over time Dynamic factor-based model Minimum capital level guidelines Trends are key
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
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