Analysis of S&P Rating Factors for U.S. and Bermuda Companies. October 2013

Transcription

1 Analysis of S&P Rating Factors for U.S. and Bermuda Companies October 2013

2 Overview and Key Findings Study Overview 48 U.S. and Bermuda based P&C companies with interactive S&P ratings Analysis of key rating factors and modifiers: Business Risk Profile (BRP) Financial Risk Profile (FRP) IICRA Capital & Earnings Competitive Position Risk Position ERM and Management & Governance Holistic Analysis Reviews correlation between financial strength rating (FSR) and key rating components Source: S&P company reports as of September 2013 Key Findings While 30% have Very Strong or better Competitive Position, no companies have Excellent Business Risk Profile (BRP) because the IICRA for U.S. P&C business is Intermediate Risk 79% of companies have Very Strong or better Capital & Earnings (C&E), but only 37% of companies receive a Financial Risk Position (FRP) of Very Strong or better 67% of companies have a Risk Position of Moderate Risk or higher, which is a drag on FRP resulting in a lower score than the C&E stand-alone results S&P applied a Holistic adjustment to 9 (or 19%) of the companies, with 7 companies receiving a positive adjustment and 2 companies receiving a negative adjustment The FSR and rating anchor were the same for 63% of companies; for 29% the FSR was greater than the rating anchor; and for 8% the FSR was less than the rating anchor Only companies with Strong or better ERM are rated AA- or higher 1

3 Criteria Overview & Rating Changes In May 2013, S&P released new criteria on insurer ratings methodology in order to Improve transparency Increase specificity of rating factors and sub-factors Create a more forward looking approach that increases comparability and consistency Centralize insurance criteria framework into one single criteria document Globally, most ratings were unchanged due to the new criteria, in line with S&P s guidance Rating Updates* 8% 3% 5% 3% Rating Upgrade Rating Downgrade 81% Affirmed - Outlook Improved Affirmed - Outlook Lowered Affirmed - No Change Source: S&P *as of August 28, Population based on global rating changes of P&C/Life/Re firms listed in major S&P criteria change press releases 2

4 Business Risk Profile (BRP) Components IICRA Distribution 4% Very Low Risk Low Risk Intermediate Risk Moderate Risk High Risk 96% Very High Risk Industry and Country Risk Assessment (IICRA) distribution dominated by Intermediate assessment for the study population IICRA determined by Gross Premiums Written distribution by country and sector U.S. P/C insurance industry assessed Intermediate Risk Portion of population with Low Risk has sizeable amount of U.S. Life or U.S. Health premiums Competitive Position Distribution 2% 10% 13% Extremely Strong Very Strong 17% Strong Adq. 58% Less than adq. Weak Competitive Position assessments varied by company 30% rated Very Strong or better Competitive Position incorporates 6 sub-factors 1. Operating Performance 2. Brand or Reputation 3. Market Position 4. Distribution Channels 5. Geographic Diversification 6. Other Diversification 3

5 Business Risk Profile (BRP) Assessment Business Risk Profile Assesment Competitive Position assesment Intermediate Risk IICRA Low Risk Extremely Strong Very Strong Excellent Very Strong Very Strong Very Strong Strong Strong Strong Adq. Satisfactory Satisfactory Less than adq. Fair Fair Weak Vulnerable/Highly Vulnerable/Highly No companies in our population achieved an Excellent Business Risk Profile due to impact of IICRA IICRA for U.S. P/C market = Intermediate Risk Interestingly, given an Intermediate Risk IICRA assessment, there is no difference in impact on BRP between Extremely Strong or Very Strong competitive position The list of companies in our composite who have Competitive Position assessed as Extremely Strong or Very Strong are listed below: ACE Progressive BRP Distribution Allstate QBE Insurance Group Vulnerable or lower 0% AXIS Capital Chubb RenaissanceRe State Farm Fair 2% Hartford Finl Services Travelers Satisfactory 8% HCC Insurance PartnerRe W.R. Berkley Zurich Insurance Co Strong 60% Very Strong 29% Excellent 0% 4

6 Financial Risk Profile (FRP) Components Distribution of Capital & Earnings 6% 2% Extremely Strong Very Strong 13% Strong 42% Mod. strong Upper adq. Lower adq. 37% Less than adq. Weak Distribution of Risk Position 2% Low Risk 29% 33% Int. Risk Moderate Risk High Risk Very High Risk 36% Capital & Earnings(C&E) distribution heavily weighted towards the upper end of spectrum 79% of companies scored Extremely or Very Strong C&E driven by a prospective view of S&P s capital model Assessment guidance for prospective model result: Extremely Strong: excess capital at AAA rating level Very Strong: excess capital at AA rating level Strong: excess capital at A rating level Risk position assessment is for risks not captured in S&P s capital model or risks that could create significantly more volatility 33% of the population had an Intermediate Risk Position, or the category that does not adjust the C&E score A closer look into High or Very High risk positions illustrate common themes: Potential capital or earnings volatility due to significant catastrophe and/or terrorism exposure Writers with concentration of long-tail reserves 5

7 Financial Risk Profile (FRP) Assessment Risk Position Weak or lower Less than adq. Lower adq. Upper adq Capital & Earnings 0% 2% 2% 2% Adjusted by Results in Financial Risk Profile Financial Flexibility FRP Distribution The Financial Risk Profile (FRP) is driven by S&P s assessment of Capital & Earnings, which includes a forward-looking perspective of an insurer s capital adequacy for both the current year and two subsequent years. Once Capital & Earnings have been assessed, Risk Position and Financial Flexibility can improve, weaken, or have no effect on FRP We have not included a distribution on Financial Flexibility as those results do not typically impact score: Driven by access to capital, financial leverage and fixed charged coverage Only 4% of the population assessed Less Than Adequate which results in a one notch negative adjustment to the C&E score While 79% of the population have a Very Strong or better C&E assessment, only 37% have Very Strong or better FRP Driven by negative adjustment from Moderate or higher Risk Position Moderately strong 21% Strong 36% Very strong 29% Extremely strong 8% 6

8 ERM and Management & Governance ERM and Management & Governance is a combined assessment ranging from very strong (1) to weak (5) ERM examines whether risk management practices are executed in a systematic, consistent and strategic manner that provides for the control of losses with an optimal riskreward framework Management & governance sub-factor addresses how management s strategic competence, operational effectiveness, financial management and governance practices shape the insurer s position in the market Distribution of Mgmt. & Gov. Distribution of ERM 23% 21% Strong Satisfactory Fair 42% 6% 38% Very Strong Strong Adq. w/ SRC Adq. Weak Less than adq. 56% Weak 15% 7

9 Holistic View Of Creditworthiness Holistic Adjustment 81% 15% 4% A Holistic Adjustment can move the rating by up to one notch in either direction Can be driven by rare or strongly positive or negative characteristics of the insurer or comparative performance Criteria defines peers generally as insurers in the same country and sector or niche In-depth analysis of the holistic adjustments of subject population finds Positive adjustment driven by solid ERM and strong performance over time Most adjustments are made by comparing subject firm to peer group S&P has advised they do not expect to use this adjustment often Yes: Positive Adjustment Yes: Negative Adjustment No 8

10 Rating Anchor vs. Financial Strength Rating All Ratings 8% 29% 11% 44% 28% By Rating Anchor 64% 69% 100% 100% 100% 100% 63% 44% 71% 36% 31% FSR > anchor FSR = anchor FSR < anchor aa aa- a+ a a- bbb+ bbb bb+ FSR > anchor FSR = anchor FSR < anchor The anchor is dependent on the BRP and FRP. Once the anchor is determined, it is adjusted by ERM, Management & Governance, Liquidity and the Holistic Analysis to arrive at the Financial Strength Rating (FSR) The most common outcome was that the FSR equaled the rating anchor (63% of companies), however the rating anchor was adjusted positively for 29% of companies and lowered for 8% Only higher rating anchors of aa- and a+ were adjusted downwards driven by ERM or holistic analysis 9

11 ERM vs. Financial Strength Rating 33% 17% 17% 43% 5% 15% 33% 33% 28% 28% 11% 29% 29% Very Strong Strong Adq. (SRC) Adq. Weak ERM Rating 35% 25% 15% BB BBB+ A- A A+ AA- AA 5% None S&P s evaluation of ERM has not changed, but how the ERM rating affects the overall financial strength rating has. There is now a much more transparent and formulaic impact which pushes the ERM rating to further importance Strong linkage between ERM and FSR found Only companies with Very Strong or Strong ERM assessment have FSR of AA- or higher 10

12 Capital & Earnings vs. Financial Strength Rating 15% 10% 6% 6% 17% 17% 17% 33% 30% 17% 44% 33% 100% 30% 22% 10% 5% 6% 50% Extremely Strong Very Strong Strong Moderately Strong Upper Adequate C&E Assessment 33% BB BBB+ A- A A+ AA- AA Moderate linkage between Capital & Earnings and FSR Impact of Risk Position can be material The majority of the population has a Strong or better Capital & Earnings assessment 70% of companies with Very Strong or better Capital & Earnings assessment have an FSR of A or greater 11

13 Contact List Patrick Matthews, CFA Head of Global Rating Agency Advisory John Fugit, Jr., CFA Rating Agency Advisory US Anthony DiLorenzo Rating Agency Advisory US