Best's Credit Rating Methodology

A.M. Best has updated its 2011 statement year Life/Health Supplemental Rating Questionnaire (SRQ). A subset of the SRQ containing new and revised questions is being made available in order to provide more time to all parties associated with its completion. Producer detail and distributor rankings in questions 2 and 3 have been simplified. Information regarding distributor source for annuity and accident and health premiums in questions 6 and 10 is no longer requested. Question 7a has been added to capture data for guaranteed benefits on equity index and variable annuities. Question 17b has been added to request additional fixed income portfolio information. Question 20c has been added to support hedging credit now allowed to determine NAIC risk based capital. A complete discussion of all changes for 2011 will be included in the instructions.

In addition, the 2011 Canada Life/Health SRQ is being made available as it will now be on the same platform as the US SRQ. Question 5 has been added to request additional fixed income portfolio information.

Special Notice: Updated and New Property/Casualty SRQ Questions
In an effort to provide more time to all parties associated with the completion of A.M. Best's Property/Casualty Supplemental Rating Questionnaire (SRQ), a subset of the SRQ containing the new and revised questions is being made available ahead of the 2012 release. The new questions include the bond quality and maturity distribution question (3b), the aging of uncollected premium balances question (6c), the confirmation of world wide exposures used in the calculation of natural catastrophe PMLs (25g-19), the natural catastrophe PML sensitivity testing question (26d), and the natural catastrophe deterministic loss scenario question (28c). Revised questions include the pricing and policy count related questions (7a, 7b) which now include an additional year, the natural catastrophe PML question (26a) which now asks for aggregate season PMLs in addition to per occurrence PMLs, the reasons for changes in catastrophe loss estimates question which now includes management's view (27a), and the financial projections questions (45b, 45c) which now include additional income statement items. The SRQ software will also request the consolidated surplus of the rating unit for which the SRQ is being completed in order to reduce the amount of manual input required for questions that include a ratio to PHS. For more information, or if you have questions, please contact your analyst.

Criteria Reports

Additional relevant criteria reports published by A.M. Best are listed below. Please contact us if you have questions regarding these publications or cannot locate information on a specific topic.

• Draft: BCAR for Title Insurance Companies - A.M. Best's interactive rating process for title insurance companies is intended to provide an opinion on a company's ability to meet its ongoing obligations to policyholders. The evaluation of a company's financial strength is based on an in-depth analysis of its balance sheet strength, operating performance and business profile.
• Draft: Rating Title Insurance Companies - A.M. Best's rating process for title insurance companies is intended to evaluate a company's ability to meet its ongoing obligations to policyholders. The criteria to evaluate a company are based on in-depth analysis of both quantitative and qualitative measures, including balance-sheet strength, operating performance and business profile.
• Draft: Life Settlement Securitization - Read how A.M. Best Co. rates securities backed by life settlements (i.e. insurance policies bought in the secondary market).
• Draft: Rating Protected Cell Companies - The purpose of this criteria report is to discuss how existing A.M. Best rating criteria would apply to the rating analysis of some forms of protected cell companies.
• Draft: Evaluating Non-Insurance Ultimate ParentsThis criteria report details a two-step process that is employed when a rated insurer has a non-insurance owner. The first step contemplates gathering information to derive a stand-alone assessment of the insurance company to be rated. The second step contemplates whether an adjustment is necessary to distill a published rating to be assigned to the insurer.
• Draft: Analyzing Contingent Capital Facilities - A.M. Best believes a primary concern for an insurance organization is its need to maintain an amount of capital that is commensurate with the entity's risk profile.
• Draft: Rating Surplus Note And Insurance Trust-Preferred CDOs - This criteria report outlines A.M. Best's rating process for rating collateralized debt obligations which have opened up a new funding source for small to medium-sized insurance companies.
• A.M. Best's Perspective on Operating Leverage - In forming an overall opinion of a company's balance sheet strength - the most important area in determining a company's ability to meet its current and ongoing obligations to policyholders - A.M. Best Co. reviews the organization's financial leverage.
• Rating Natural Catastrophe Bonds - This criteria report offers a concise overview of Best's approach to rating structured debt instruments that transfer risks associated with low frequency/high-severity events to investors.
• Assessing the "Tail Risk" of Sidecars - Read how A.M. Best determines the amount of "tail risk" that is associated with sidecars. Tail risk is the risk that will be borne by the ceding insurer/reinsurer if the sidecar is not sufficiently capitalized.
• A.M. Best's Liquidity Model for U.S. Life Insurers - As part of its standard analytical review of all companies, A.M. Best has detailed discussions about management of liquidity risk. A.M. Best believes that the measurement of a company's liquidity is one of the most important factors in determining a life insurer's financial strength.
• Tail Risk and the BCAR - Tail risk associated with sidecars is incorporated in the assessment of the sponsor's Financial Strength Rating and how it is reflected in the BCAR calculation.
• Rating Sidecars - This criteria report offers a concise overview of Best's approach to rating property and casualty sidecars and their use as an attractive alternative to traditional retrocession.
• Rating Members of Insurance Groups - Illustrates how A.M. Best evaluates members of insurance groups and reviews what levels of rating enhancement or drag are placed on such groups.
• Alternative Risk Transfer (ART) - The purpose of this alternative risk transfer (ART) criteria report is to delineate the rating considerations specific to ART vehicles in the following broad categories: single-parent (or pure) captives, group captives, risk retention groups and self-insurers funds.
• Analyzing Commercial Paper Programs - read our analysis on the rating process behind short-term debt obligations.
• Takaful (Shari'a Compliant) Insurance Companies - This report highlights the main issues arising when applying A.M. Best's rating methodology to takaful insurance companies. Takaful is clearly on the rise, particularly in the Middle East and Malaysia, but A.M. Best's main principles remain unchanged, regardless of the type of company analyzed.
• Understanding Universal BCAR - A.M. Best's Capital Adequacy Ratio for Insurers - The purpose of this report is to document the existing criteria related to A.M. Best's Universal BCAR model. The objective of A.M. Best's rating system is to provide an opinion of an insurer's financial strength and ability to meet ongoing obligations to policyholders.
• Catastrophe Analysis in A.M. Best Ratings - A.M. Best considers catastrophic loss, both natural and man-made, to be the No.1 threat to the financial strength and credit quality of property and casualty insurers due to the significant, rapid and unexpected impact that can occur.
• Rating Funding Agreement-Backed Securities - Read how A.M. Best Co. approaches the rating of securities and related programs that are backed by funding agreements issued by U.S. life insurers.
• Understanding BCAR for Canadian Property/Casualty Insurers - A.M. Best has released a criteria report addressing the quantitative and qualitative factors affecting ratings of Canadian property/casualty companies.
• Rating Closed-Block Monetizations - This criteria report provides transparency regarding how A.M. Best Co. assigns ratings to the notes, issued to investors, that are serviced by the cash flows from a closed-block monetization. The underlying creditworthiness of the insurer, as measured by its Best's Financial Strength Rating, is one of the key drivers of the rating assigned to the monetization's notes.
• Securitization of Period-Certain and Life-Contingent Structured Settlements - Read how A.M. Best evaluates securities collateralized by period-certain and life-contingent structured settlements.
• Understanding BCAR for Life/Health Insurers- The objective of A.M. Best Co.'s financial strength ratings is to provide an opinion of an insurer's financial strength and ability to meet its ongoing obligations to policyholders. The assignment of an interactive rating is derived from an evaluation of a company's balance sheet strength, operating performance and business profile.
• The Treatment of Terrorism Risk in the Rating Evaluation - The purpose of this report is to explain A.M. Best's treatment of terrorism risk in the rating evaluation of property/casualty insurers. A.M Best believes that a comprehensive terrorism risk management process is crucial to the financial strength rating of any insurer with a material exposure to terrorism risk.
• Understanding BCAR for Property/Casualty Insurers - A.M. Best's assignment of an interactive rating is derived from an in-depth evaluation of a company's balance-sheet strength, operating performance and business profile, as compared with A.M. Best's quantitative and qualitative standards.
• Equity Credit for Hybrid Securities - This criteria report summarizes A.M. Best's treatment of equity credit for hybrid securities issued by insurance-related entities and highlights the importance of debt-service capabilities.
• Securitization of Reinsurance Recoverables - Read A.M. Best's criteria report on how it rates securities collateralized by reinsurance obligations.
• Gauging the Basis Risk of Catastrophe Bonds - Read how A.M. Best determines the basis risk inherent in parametric catastrophe bonds.
• Rating New Company Formations - A.M. Best provides ratings on new and innovative products and services and other risk-assuming vehicles using criteria outlined in this report. In rating new company formations, A.M. Best uses the same assessments of balance sheet strength and business profile as it does for established companies receiving traditional rating assignments.
• Securitization of Annuities - Read our criteria report on "Securitization of Annuities".
• Assessing Country Risk - The purpose of this criteria report is to illustrate how A.M. Best defines country risk as the risk that country-specific factors could adversely affect an insurer's claims-paying ability.
• Rating Life-Related Premium Financing Loan Securitizations - This criteria report discusses A.M. Best's considerations in rating the securitization of a pool of premium financing loans.
• Rating European Mutual Insurers - This report outlines how A.M. Best applies its rating methodology to European mutual insurance companies. Throughout this criteria report, the term "mutuals" will indicate any insurance company without capital stock and for which the ultimate control is vested in the policyholders.
• Measuring Transfer and Convertibility Risk - A.M. Best defines transfer and convertibility risk as the risk that capital and exchange controls may be imposed by government authorities that would prevent the private sector's ability to convert local currency into foreign currency and/or transfer funds to nonresident creditors.
• Rating Lloyd's Syndicates - A.M. Best's rating criteria for Lloyd's syndicates address factors specific to individual syndicates and not already covered by A.M. Best's well-established insurance rating methodology.
• Life Settlement Securitization - Read how A.M. Best Co. rates securities backed by life settlements (i.e. insurance policies bought in the secondary market).
• Rating Protected Cell Companies - The purpose of this criteria report is to discuss how existing A.M. Best rating criteria would apply to the rating analysis of some forms of protected cell companies.
• Risk Management and the Rating Process for Insurance Companies - In this paper, A.M. Best explores the key risk management trends in the insurance industry and describes how risk management impacts the overall rating process and the development of capital requirements.
• BCAR For Title Insurance Companies - A.M. Best's interactive rating process for title insurance companies is intended to provide an opinion on a company's ability to meet its ongoing obligations to policyholders. The evaluation of a company's financial strength is based on an in-depth analysis of its balance sheet strength, operating performance and business profile.
• Best's Idealized Default Matrix - provides the default table used by A.M. Best's Structured Finance Group for rating securities in structured transactions.
• A.M. Best's Title Insurance Rating Methodology - A.M. Best's rating process for title insurance companies is intended to evaluate a company's ability to meet its ongoing obligations to policyholders. The criteria to evaluate a company are based on in-depth analysis of both quantitative and qualitative measures, including balance-sheet strength, operating performance and business profile.
• Analyzing Finance Companies - The analytical framework for assessing finance companies highlights special issues particular to the finance industry.
• Analyzing Commercial Banking Operations - Globally, increasing numbers of banks and insurers have expanded operations into each other's industry. Based on this growing trend, A.M. Best Co. has released a criteria report for evaluating the financial health of the banking operations of insurance-related enterprises.
• Evaluating Health-Care Systems - A.M. Best Co. evaluates the ability of not-for-profit U.S. hospitals and health-care systems to support their health maintenance organizations and captive insurance company subsidiaries.
• A.M. Best's Ratings & the Treatment of Debt - provides specific information outlining the relationship between Best's Financial Strength Ratings and Best's Debt Ratings.