September 28, 1999
New York, NY

A.M. Best: As Industry Evolves, So Does Rating Approach
Larry G. Mayewski, Senior Vice President, A.M. Best Co.

As insurance blends into the broader financial-services industry, rating agencies must expand their capabilities and services, a senior A.M. Best Co. executive told analysts and investors Tuesday.

Larry G. Mayewski, senior vice president for ratings at A.M. Best Co., said his agency has launched a number of new initiatives intended to better cover and report on the insurance industry, including:

- Introducing debt ratings;

- Expanding managed-care ratings;

- New coverage of alternative-risk vehicles, by which companies manage risk without traditional insurance coverage; and

- Worldwide ratings.

The 100-year-old company has expanded its global presence in recent years by launching and acquiring operations in Europe and Canada. It also has expanded its rating coverage in Asia and the Middle East.

Mayewski said he expects the company to begin assigning ratings to a broader array of insurance-company debt, including catastrophe bonds, securitization transactions and commercial paper.

Overall, the life insurance industry is financially secure, but many companies are challenged to keep up with the rapidly changing financial-services landscape, Mayewski said. Citigroup Inc. may have been only the largest of what will prove to be an ongoing wave of large-scale mergers and acquisitions. Citigroup still has more than three years before the law must change to allow bank-insurer combinations.

"At some point, Washington will catch up with the realities of the marketplace," Mayewski said.

Mayewski addressed several issues:

- Despite stronger recent financial results, Mayewski said ratings are on a downward trend because the rating agency not only reviews a company's history but evaluates future prospects. "The question is, will they sustain that performance in the next three to five years," he said. "There are fewer companies, we believe, that will be able to sustain that level of performance." The marketplace of the future will be significantly different from that of the past, he said.

- Insurers not embracing the Internet--or at least recognizing it as a source of competition--are "going to be in trouble over the long run," Mayewski said. That doesn't necessarily mean selling products online, but it does mean using online capabilities to become better at services and operations essential to a company's business.

- Ratings are not just about the short term, Mayewski said. "You have to be willing to make tough decisions and do what's right, or you lose your credibility--which is the cornerstone of the rating business," he noted.

Mayewski spoke at the life insurance segment of the CIBC World Markets conference, co-sponsored by A.M. Best.

"We feel it's important to bring our message to the investment community at an event like this," Mayewski said. "As has the insurance industry, we have been broadening our rating activity and skills throughout the financial services arena both domestically and abroad."