What's Behind Our Ratings On The Top 15 Global Multiline Insurers Following The Application Of Our New Criteria

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1 What's Behind Our Ratings On The Top 15 Global Multiline Insurers Following The Application Of Our New Primary Credit Analysts: Volker Kudszus, Frankfurt (49) ; Tracy Dolin, New York ; Secondary Contacts: John Iten, New York (1) ; Mark A Legge, Melbourne (61) ; mark.legge@standardandpoors.com Reina Tanaka, Tokyo (81) ; reina.tanaka@standardandpoors.com Sanjay Joshi, London (44) ; sanjay.joshi@standardandpoors.com Simon Ashworth, London (44) ; simon.ashworth@standardandpoors.com Taos D Fudji, Milan (39) ; taos.fudji@standardandpoors.com Lotfi Elbarhdadi, Paris (33) ; lotfi.elbarhdadi@standardandpoors.com Laline S Carvalho, New York ; laline.carvalho@standardandpoors.com Shellie A Stoddard, New York ; shellie.stoddard@standardandpoors.com Taoufik Gharib, New York ; taoufik.gharib@standardandpoors.com Li Cheng, CFA, FRM, FSA, New York (1) ; li.cheng@standardandpoors.com Table Of Contents We generally believe the GMI have capabilities to manage risk exposures Financial risk management differentiates our view of management and Most Of The Outlooks Are Stable Appendix: How We Derive A Financial Strength Rating On An Insurer Related And Research JUNE 4,

2 What's Behind Our Ratings On The Top 15 Global Multiline Insurers Following The Application Of Our New For the group of 15 global multiline insurers that Standard & Poor's Ratings Services rates, the recent revision of its insurance rating methodology led to three outlook revisions, but no changes to the ratings. However, our analysis of these insurers under the revised criteria has yielded several credit insights. All in all, we currently see subdued pressure on the ratings on these global multiline insurers (GMI) because of better earnings and improved risk positions, but it might be premature to say we see a positive trend. This follows a somewhat negative trend in recent years because of adverse global economic conditions, historically low interest rates related to the weak economic trends, and heightened sovereign-related risks. Overview We currently see subdued pressure on the ratings, following a somewhat negative trend in recent years because of tough economic conditions, leading to increased risk-based capital requirements and dampened investment income. Our assessment of the competitive position of the top 15 global multiline insurers shows evidence of superior operating performance compared to the rest of the industry. GMI have leading positions in several significant insurance markets, enabling them to more quickly take advantage of improving property/casualty pricing trends than other market participants. Risk positions, particularly for life insurance operations, have gradually improved due to the derisking of investment portfolios and a shift in business profile to rely less on capital-intensive products owing to their enterprise risk management practices. The objective of the revised criteria is to provide greater transparency and global comparability to our ratings, and doesn't signal a radical change in how we assess creditworthiness. The operating units of the top 15 GMI that we rate continue to have high ratings--most are either 'AA-' (40% or 7) or 'A+' (33% or 6). Two-thirds of the GMI's outlooks remained stable following the application of our criteria to this group (see "Standard & Poor's Applies Its Revised Insurance To 23 Large Rated Insurance Groups And Their Subsidiaries," published on May 22, 2013). However, we revised one stable outlook to positive on Switzerland-based ACE Ltd., and two negative outlooks to stable on U.K.-based Prudential PLC, and Australia-based QBE Insurance Group Ltd.: The outlook on Switzerland-based ACE Ltd. was revised to positive from stable reflecting our view that the group will continue to post superior operating performance relative to its multiline insurance peers, supporting its extremely capital adequacy and extremely competitive position. Furthermore, we expect ACE's diverse business mix and prudent catastrophe-management practices to continue reducing the group's exposure to any one line of business, and its earnings to be among the least volatile in its peer group. See "ACE Ltd. And Core Operating Subsidiaries Ratings Affirmed On Review; Outlooks Revised To Positive From Stable," May 22, U.K.-based Prudential PLC's outlook was revised to stable from negative reflecting our opinion that risks relating to JUNE 4,

3 the group's growth strategy are now less likely to constrain our view of its business risk profile than previously based upon our Insurance Industry And Country Risk Assessment (IICRA). This is combined with our view that pressures on the group's financial risk profile have subsided over recent months, predominantly from retained earnings that have been higher than we expected and derisking. See "Outlook On Prudential PLC's Core Subsidiaries Revised To Stable And 'AA' Ratings Affirmed On Insurance Change," May 22, The outlook on Australia-based QBE Insurance Group Ltd. was revised to stable from negative to reflect our expectation of capital adequacy improvements such that it will be consistently and solidly at the 'A' level, according to our model, over We believe QBE has the ability and commitment to strengthen its capital position through internally generated capital and its financial flexibility. See "QBE Core Operating Cos. Affirmed At 'A+', Outlook Revised To Stable; Holding Cos. Lowered On Insurance Change," May 22, The GMI we rate comprise the most diverse insurance businesses globally, showing the est diversification by product and region. This is well reflected in a range of "very " to "extremely " competitive position scores (see tables 1-3 below for these scores and other ratings components on the top 15 GMI). In our assessment of the GMI's competitive position, we see some evidence of superior operating performance compared to smaller and less diversified competitors. In several significant insurance markets, the GMIs have market-leading positions and are among the first market participants to profit from improved property/casualty (P/C) pricing trends. GMI also have been more successful than other insurance companies at adapting to economic headwinds and lingering low interest rates by slowly evolving their business mix to emphasize more stable products. We assess the IICRAs as "intermediate" for two-thirds of the GMI. For the remaining one-third, we see the IICRAs as "low". Our assessments arise from our view of generally "low" country risk, and "intermediate" and "low" industry risks for non-life and life insurance operations, respectively, of the GMI. Because these insurers operate in more than one country or sector, we assign a weighted-average IICRA assessment by calculating the rounded-off average of the IICRA assessments for the insurer's country and sectors. The IICRA, combined with our view about the GMI's competitive position in the markets where they operate, results in our assessment of their business risk profile. On average we view the business risk profile as "very " for GMIs, with ING Verzekeringen N.V. and XL Group Ltd. at the "" end and Allianz SE, and Prudential PLC at "extremely " end of the range. Our view of the financial risk profile for the group is "very " on average, with Assicurazioni Generali SpA on the lower end of the range at "moderately." As part of our analysis of the financial risk profile, we assess the risk position to be of moderate to intermediate risk for most GMI, except for XL, whose risk position we see as high risk. Also part of our analysis of financial risk profile, we assess the capital and earnings assessment for the GMI as "very " on average, with Assicurazioni Generali and AXA with a score of "moderately " and ACE and XL with "extremely " scores. These generally "very " capital and earnings assessments reflect on average superior capitalization and more diversified earnings streams, compared with their less diversified competitors. We generally believe the GMI have capabilities to manage risk exposures The GMI are complex organizations that are all exposed to a variety of insurance risks globally. Accordingly, we view JUNE 4,

4 enterprise risk management (ERM) having "high" importance to the ratings and we assess ERM on average as "." Accordingly, we believe the GMI have capabilities to consistently identify, measure, and manage risk exposures and losses within their chosen risk tolerances. Allianz SE is the only insurer with a "very " ERM assessment. Our view of ERM for Assicurazioni Generali, Aviva PLC, and U.S.-based Prudential Financial, Inc. have an ERM assessment of "adequate" with risk controls, AIG is adequate, and the 11 other GMI have a ERM assessment. For GMI, ERM rarely leads to rating uplift, as we expect ERM for those insurers whose ratings are in the 'AA' rating category. Financial risk management differentiates our view of management and Our management and assessments for the GMI range evenly from "satisfactory" to "." While we mostly have a positive view about their strategic positioning and operational effectiveness, we differentiate those demonstrating superior financial risk management, which includes lower risk appetites, more sophisticated and comprehensive financial standards, and the ability to set and achieve more rigorous operational performance relative to the industry average. Most Of The Outlooks Are Stable We see a balanced distribution of outlooks for the 15-largest GMI: most of them are stable, but three are negative and two are positive. As we noted above, we revised three outlooks when we applied the revised insurance criteria--all of them in an improving direction. It might be premature to say we see a positive trend to the ratings for the GMI. However, following a somewhat negative trend for the ratings in recent years because of tough economic conditions, leading to increased risk-based capital requirements and dampened investment income, we currently see reduced pressure on the ratings. GMI in our view benefit from global diversification as well as generally very financial risk profiles. For many GMI, our view of very capital and earnings is counterbalancing an intermediate risk position. Derisking of investment portfolios as well as a focus on less capital-intensive new products has improved the GMI's risk positions. In addition, greater earnings retention strengthened the capital and earnings position. We assume in our base case scenario that sustainably low interest rates will dampen recurring investment income for some time and challenging economic conditions will constrain volume growth. However, these assumptions are already reflected in the current ratings on the GMI. JUNE 4,

5 Table 1 Ratings Components For Life And P/C Insurers With Broad Geographic Reach FSR Home country Outlook Anchor Business risk profile IICRA Competitive position Financial risk profile Capital and earnings Risk position Financial flexibility Modifiers ERM and management ERM Management and Holistic analysis Liquidity American International Group Inc. Allianz SE Aviva PLC AXA Assicurazioni Generali SpA A+ AA A+ A+ A AA- Zurich Insurance Co. Ltd. U.S. Germany U.K. France Italy Switzerland Stable Stable Stable Stable Negative Stable aa- aa a+ a a aa- Excellent Intermediate risk Intermediate risk Extremely Low risk Strong Moderately Intermediate risk Extremely Moderately Strong Moderately Moderate risk Intermediate risk Intermediate risk Upper adequate Moderately Intermediate Risk Extremely Strong Moderate risk Moderate risk Moderate risk Intermediate Risk Strong Strong Strong Strong Adequate Strong Adequate Adequate with risk controls Strong Adequate with risk controls Strong Satisfactory Strong Satisfactory Strong Satisfactory Strong Exceptional Exceptional Exceptional Exceptional Exceptional Exceptional The ratings and outlooks reflect those on the main operating company. Ratings on May 22, ERM--Enterprise risk management. FSR--Financial strength rating. ICR--Issuer credit rating. IICRA--Insurance Industry And Country Risk Assessment. P/C--Property/casualty. JUNE 4,

6 Table 2 Ratings Components For P/C Insurers With Broad Geographic Reach FSR Home country Outlook Anchor Business risk profile IICRA Competitive position Financial risk profile Capital and earnings Risk position Financial flexibility Modifiers ERM and management ERM Management and Holistic analysis Liquidity QBE Insurance (Australia) Ltd. ACE Ltd. XL Capital Group A+ AA- A AA- Australia Switzerland Cayman Islands Japan Stable Positive Positive Negative a aa- a aa- Strong Tokio Marine & Nichido Fire Insurance Co. Ltd. Intermediate risk Intermediate risk Intermediate risk Intermediate risk Extremely Strong Extremely Moderately Strong Strong Strong Extremely Extremely Strong Moderate risk Moderate risk High risk Intermediate risk Strong Strong Strong Strong Strong Strong Strong Strong Satisfactory Strong Satisfactory Strong Exceptional Exceptional Strong Exceptional The ratings and outlooks reflect those on the main operating company. Ratings on May 22, ERM--Enterprise risk management. FSR--Financial strength rating. ICR--Issuer credit rating. IICRA--Insurance Industry And Country Risk Assessment. P/C--Property/casualty. JUNE 4,

7 Table 3 Ratings Components For Life And Savings Insurers With Broad Geographic Reach FSR Home country Outlook Anchor Business risk profile IICRA Competitive position Financial risk profile Capital and earnings Risk position Financial flexibility Modifiers ERM and management ERM Management and Holistic analysis Liquidity Aegon N.V. ING Verzekeringen N.V. MetLife Inc. Prudential Financial Inc. AA- A+ AA- AA- AA Netherlands Netherlands U.S. U.S. U.K. Stable Negative Stable Stable Stable aa- a aa- aa- aa Prudential PLC Strong Excellent Low risk Intermediate risk Low risk Low risk Low risk Strong Extremely Strong Strong Intermediate risk Intermediate risk Intermediate risk Intermediate risk Intermediate risk Strong Strong Strong Strong Strong Strong Strong Strong Adequate, risk controls Strong Satisfactory Satisfactory Strong Strong Satisfactory Exceptional (1) Strong (2) Exceptional (1) Exceptional (1) Strong (2) The ratings and outlooks reflect those on the main operating company. Ratings on May 22, ERM--Enterprise risk management. FSR--Financial strength rating. ICR--Issuer credit rating. IICRA--Insurance Industry And Country Risk Assessment. The ratings information in tables 1-3 relates to the core operating entities of each group when the parent entity is a holding company. This presentation makes the comparisons among insurance groups more consistent because our credit analysis focuses on the consolidated group. Depending on the jurisdiction, we typically rate insurance holding companies two to three notches lower than the group credit profile (GCP), taking into account the degree of structural subordination within insurance groups. The tables show the anchors, factor assessments, and ERM and management assessment and holistic analysis modifiers, if any, for each group. Of the 15 GMI, we assign an holistic analysis modifier only to XL Group Ltd. Generally, the holistic analysis modifier adjusts the SACP or GCP by up to one notch in either direction to capture a more holistic view of creditworthiness; and to recognize sustained, predictable operating and financial underperformance or outperformance, informed by comparative analysis. We gave XL a holistic analysis modifier of one notch below its GCP because the company's fixed-charge coverage ratios have been below those of its peers. However, we recognize the improving trends in XL's financial coverage metrics, which partly reflect our positive outlook on the ratings. JUNE 4,

8 Appendix: How We Derive A Financial Strength Rating On An Insurer For illustrative purposes, we explain here how we derive the financial strength rating on a typical GMI's insurance operating group of core subsidiaries. We start with the anchor of 'aa-' based upon the group's very business risk profile (BRP) and very financial risk profile (FRP). The business risk profile is derived from the combination of the relevant industry and country risk assessments, and the insurer's competitive position. The financial risk profile is derived from the combination of the assessments for capital and earnings, risk position, and financial flexibility. Next, we combine ERM and management and into a single assessment. The outcome of the ERM and management assessment results in an indicative GCP that is equivalent or modified by one notch up or down from the anchor. We view a typical GMI as having ERM that is highly important to the rating. We view ERM as "" for most GMI. For about half of them, we see management and as "," resulting in a "very " combined assessment. The 'aa-' anchor is not modified by the "very " ERM and management assessment. Next, we view liquidity as either "exceptional" or "" for a typical GMI's insurance operating group. Our three est scores for liquidity ("exceptional," "," or "adequate") do not affect an insurer's SACP, GCP, or long-term issuer credit rating. Consequently, the insurer financial strength rating for a typical GMI's core subsidiaries is 'AA-'. Related And Research Standard & Poor's Applies Its Revised Insurance To 23 Large Rated Insurance Groups And Their Subsidiaries, May 22, 2013 Insurance Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 Group Rating Methodology, May 7, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Principles Of Credit Ratings, Feb. 16, 2011 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com JUNE 4,

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