jim fowler, a.m. best - interactive rating process for captives - may, 2015

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JIM FOWLER, Business Development Manager

A.M. Best Company and the Interactive Rating Process

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Outline

• Introduction to A.M. Best

• About A.M. Best ratings

• Rating methodology and key components

• The rating process

Introduction to A.M. Best

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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 4,000 companies in >80 countries

– Rated first captives 1970s-1980s

– Began rating new company formations 2001

– Published separate captive methodology 2002

– Published protected-cell methodology 2008

• Awarded Best Global Rating Agency at the Reactions Global Awards six years running 2009 – 2014

• Only rating agency focused on the insurance industry:

– Methodologies are specific to the insurance industry

– Analysts are insurance specialists and only analyze insurance companies

– Ability to provide specific indications as to the main drivers of a rating grounded in industry knowledge

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Accredited Rating Agency

• Nationally Recognized Statistical Rating Organization (NRSRO) designation by the U.S. Securities & Exchange Commission (ECAI comparable)

• Registered with international regulatory agencies in the following regions: Australia*/New Zealand, European Union

*An AFS Licensed Credit Rating Agency

• Licensed corporation in Hong Kong and Singapore

• Licensed representative office in Dubai

• Authorized Credit Rating Agency in Brazil and Mexico

About A.M. Best Ratings

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A.M. Best Credit Ratings

Issuer Credit Rating (ICR)

• An independent opinion of an issuer’s ability to meet its ongoing senior financial obligations

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

• Supported by impairment studies

• Relates to a legal entity not a group

• Not a warranty of a company’s financial strength

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Other Types of A.M. Best Ratings

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) Rating• An independent opinion of an issuer’s ability to meet its

ongoing financial obligations to security holders when due

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A.M. Best Rating Scales

FSR ICR

Secu

re

Inve

stm

ent G

rade

A++ aaaaa+

A+ aaaa-

A a+a

A- a-

B++ bbb+bbb

B+ bbb-

FSR ICR

Vuln

erab

le

Non

-Inve

stm

ent G

rade

B bb+bb

B- bb-b+

C++ bb-

C+ ccc+

C cccccc-

C- cc

FSR = Financial Strength RatingICR = Issuer Credit Rating

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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

• Under review– Typically associated with a pending transaction or other

significant event that causes A.M. Best to re-evaluate rating

– Short-term in nature… typically, a rating is under review no longer than 6 months

Positive Stable Negative

Positive Developing Negative

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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 entrenched in

legislation

Ratings are increasingly becoming entrenched in insurance legislation around the world as regulatory regimes evolve and their sophistication increases

The Growing Importance of Credit Quality

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Captives Rated Globally by A.M. Best

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Breakdown by Captive Type

Single Parent Cap-tives; 37%

Group Captives; 34%

RRGs; 21%

Exchanges; 4%

Cell Captives; 2%

Self Insurance Funds; 2%

Single Parent CaptivesGroup CaptivesRRGsExchangesCell CaptivesSelf Insurance Funds

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Breakdown by Captive Industry

Commercial Property / Ca-sualty18%

Energy5%

Health3%

General Liability8%

Professional Liability / MPLI30%

Property / Liability6%

Reinsurance7%

Other7%

Warranty3%

Workers Comp14% Commercial Property / Casualty

EnergyHealthGeneral LiabilityProfessional Liability / MPLIProperty / LiabilityReinsuranceOtherWarrantyWorkers Comp

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Drivers of Ratings

• Validation of insurance operations• Enhanced state, federal and country regulation• Greater transparency• Increasing involvement of brokers and regional

expansion• Benchmarking• Facilitates capital raising • Reinsurance negotiations• Drive to improve corporate governance practices

Rating Methodology and Key Components

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Rating Methodology Key Components

Management

Business Profile

Enterprise Risk Management

Operating Perfor

mance

Parent Company /

SponsorFinancial Analysis

Balance Sheet Strength

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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• Critical, but only one component• Starting point

The 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 Analyst — primary relationship manager

• 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)

The Interactive Rating Process

Initial Rating Year Two and onwards

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• Annual Reports- latest five years

• Audited Financial Statements for Parent and Subsidiary

• Full Actuarial Reports

• Corporate Structure / Organizational Chart and History

• Management Structure

• Biographical Information on Principal Officers

• Current Insurance Structure

• Operating Plan / Five-Year Projections

• Capital Management Strategies

• Risk Management Program• Investment Guidelines /

Strategies• Reinsurance Program /

Reinsurance Contracts• Fronting Information• Other Information Requested by

A.M. Best: – Estimated impact (Net/Gross) from

Catastrophe or other unusual event

– Details of changes in ownership, management, products or operations

– Revised projection of year-end results

– Plans to mitigate losses and/or correct and identified problem

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What Kind of Information Will Be Required?

The Management Meeting Agenda

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

Rating Process - Timing

STEP 1: Rating Engagement & Contract (Weeks 1-2)

STEP 2: Pre-Rating Preparation (Weeks 3-6)

STEP 3: Rating Meeting (Weeks 6-10)

STEP 4: A.M. Best’s Analysis (Weeks 8-12)

STEP 5: Rating Decision & Dissemination (Weeks 11-14)

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Cost and Contracts

Cost

• Approved pricing model based on:• Size (GWP)• Complexity

Contracts

• Rating Services Agreement

Rating options

Pre-engagement Options

• BD is available to address boards of directors

Initial Rating Options

• Accept the Rating• Decline the Rating• Appeal the Rating

Annual Rating Options

• Withdraw from the process

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Thank You!

Jim FowlerBusiness Development Manager• Tel: +1 908 439 2200 x5744• Mobile: +1 201 274 5589• jim.fowler@ambest.com• www.ambest.com

27Captives – March 2015