a.m. best company - world banksiteresources.worldbank.org/financialsector/resources/ambest... ·...
TRANSCRIPT
A.M. Best CompanyWorld Bank
International Insurance SymposiumOctober 15, 2012
Andrea KeenanVice President – Research, Ratings Criteria & Training
2
A.M. Best Company• Established in 1899
– Pioneered concept of insurer financial strength ratings in 1906.
– Only international ratings agency focused on the insurance industry.
• Also provides research, data, news & education– Ratings coverage of over 3500 companies in > 70
countries.– Research conducted to support ratings and reports. – Webinars and interviews are provided on website.
4
Types of Best’s Ratings• Financial Strength Rating (FSR)
– An opinion of an insurer’s ability to meet obligations to policyholders
• Issuer Credit Ratings (ICR)– An opinion of an issuer/entity’s ability to meet its
ongoing senior financial obligations• Debt Rating
– An opinion of an issuer/entity’s ability to meet its ongoing financial obligations to security holders when due
7
Users of Best’s Ratings• Insurance Companies• Agents• Brokers• Regulators • Policyholders• Financial Institutions• Investors• Academics• Employee Benefits
Managers• Boards of Directors
• Corporate Risk Managers• Consultants• Consumers• Reinsurers• Captive/Alternative Risk
Managers• Debt and Equity
Research Analysts• Investment Professionals• Government Agencies
10
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)
11
What Information Does A.M. Best Review?Public:• Financial Statements• Stockholder/Policyholder
Reports• Public Filings & Offerings• Audit Reports• Insurance Exam & Market
Conduct Reports• Regulatory Filings
Private:• Management Meetings with key
executives and management• 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 and reports• Internal Capital Models
12
Rating Events• Scheduled Review
– Rating action following annual meeting and review• Event Driven
– Rating action outside the scheduled cycle– Reflects impact of a material financial or strategic event,
or emerging trend• Debt Only
– Rating action (Debt rating only) outside the annual cycle– New security is issued or existing security withdrawn
Country Risk Impact
16
Poor asset choicesChallenges unique to the
country’s operating environment and must be explicitly addressed
“Burdensome” regulationInefficient legal system
Poor business infrastructureInadequate data
High vulnerability to financial crisis High risk to financial strength without extraordinary preparation
(capital)Inadequate regulation
Opacity in Legal SystemSocietal Instability & Violence Potential to be completely
destabilizing for any company (Most companies would be in the
vulnerable range.)
Government CorruptionWeak economic structure
17
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
18
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• Risk Management links strategy to factors
above• Management depth, experience and stability
influences profile
20
Best’s Capital Model (BCAR)
• Standard for evaluating capitalization• Model evolves over time • Dynamic factor-based model• Minimum capital level guidelines • Trends are key• Detail later in slide presentation
21
A.M. Best Rating ComponentsStrong Operating Performance Builds Balance Sheet Strength
Weak Operating Performance Erodes Balance Sheet Strength
Date of last balance sheet
Present Future
Bala
nce
Sh
eet
Str
en
gth
Time
BCAR Guideline
Business Profile DrivesStrong & Sustainable Operating Performance
BCAR Considerations• Leverage• Capital structure / holding company• Quality & appropriateness of
reinsurance program• Adequacy of loss reserves• Quality and diversification of assets• Liquidity• Profitability• Growth Rate
Adjusted Surplus
Reported Surplus (PHS)Equity Adjustments:
Unearned PremiumsAssetsLoss ReservesReinsurance
Debt Adjustments:Surplus NotesDebt Service Requirements
Other Adjustments:Potential Catastrophe Losses Future Operating Losses
Net Required Capital (NRC*)
Gross Required Capital (GRC):(B1) Fixed-Income Securities(B2) Equity Securities(B3) Interest Rate(B4) Credit(B5) Loss and LAE Reserves(B6) Net Premiums Written(B7) Off Balance Sheet
Covariance Adjustment
BCAR Ratio = Adjusted Surplus / Net Required Capital
*NRC = SQRT [ (B1)² + (B2)² + (B3)² + (0.5*B4)² + [(0.5*B4)+B5)]²+(B6)² ] + B7
BCAR Model PC Structural Overview
Adjusted Surplus
Reported Surplus (PHS)Equity Adjustments:
Asset Valuation ReservesUnearned PremiumsDividends Payable
Debt Adjustments:Surplus Notes
Other Adjustments:Operating LossesIMR Amort. Following YearOff-Balance Sheet DerivativesNegative Reserves (Canada only)
Net Required Capital (NRC*)
Gross Required Capital (GRC):(C-1-Non Eq) Fixed-Income
Securities(C-1-Eq) Equity Securities(C-2) Mortality/Morbidity(C-3-Int) Interest Rate(C-3-Mkt) VA Market (C-4) Business
Covariance Adjustment
BCAR Ratio = Adjusted Surplus / Net Required Capital
*NRC = SQRT [ (C-1-Non Eq + C-3-Int)² + (C-1-Eq + C-3-Mkt)² + (C-2)²] + C-4
BCAR Model LH Structural Overview
Fine Tuning the Analysis• Reserve Adequacy (Core vs. A&E)• Reinsurance Credit Risk Charges• Changes to Reinsurance Structure (QS)• Catastrophe Exposure (PMLs)• Affiliated Charges• Stop Loss Reinsurance (ASL, ADC, LPT)• Loss Sensitive Business• Projected Capitalization• Surplus Note/ Long Term Debt Credit• Growth Charges
26
Questions?Contact Information:
Andrea Keenan, Vice President(908) 439-2200 ext. 5084 [email protected]
Best’s Credit Rating Methodology and rating criteria can be found at:http://www3.ambest.com/ambv/ratingmethodology/
For more information about A.M. Best Company www.ambest.com
27
© 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 AM Best Company 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 AM Best Company 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 AM Best 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 AM Best Company is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The 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. 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 AM BEST COMPANY IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment 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 and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.