A.M. Best CompanyWorld Bank

International Insurance SymposiumOctober 15, 2012

Andrea KeenanVice President – Research, Ratings Criteria & Training

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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.

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A.M. Best Ratings

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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

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Relationship of ICR to FSR

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FSR & ICR Equivalents

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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

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A.M. Best Rating Process

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The Interactive Rating Process

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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)

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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

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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

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A.M. Best Rating Criteria

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Best’s Rating EvaluationKey Components

Country Risk Considerations

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Country Risk Impact

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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

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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

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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

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Best’s Capital Adequacy Model (BCAR)

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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

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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

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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

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Questions?Contact Information:

Andrea Keenan, Vice President(908) 439-2200 ext. 5084 andrea.keenan@ambest.com

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

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