Insurance Company Credit Rating Advisory Practice, Part 2
Marc Liebowitz, CFO Consulting Partners LLC
There are three primary drivers of insurance credit ratings:
- Risk adjusted capital levels
- Operating results
- Market profile which is the overall evaluation of strategies, products, underwriting strength and risk diversification.
In a previous article, we covered risk adjusted capitalization. Click here for the first article in the series. In this installment, we review how credit rating agencies evaluate operating results and market profile. Our focus is on the A.M. Best Company (AMB) and Kroll Bond Rating Agency (KBRA) methodologies as these agencies are most relevant to the mid-market insurance company ratings universe. The AMB and KBRA rating methodologies are available through their respective web sites:
To measure the relative strength of a group’s operating results, analysts, develop a view of overall earnings power and compare those estimates to peer group averages and industry norms. The major components of this analysis are:
- Comprehensive evaluation and trend analysis of financial outcomes, returns, and ratios
- Development of multi-year projections and stress testing those forecasts
- Review of key metrics for the consolidated organization and for individual business segments
- Analysis of earnings by product and of investment portfolio earnings by asset type
- Comparison of company specific results against peer group and industry-wide aggregates
Benchmarking comparisons are influential parts of the earnings analysis and management teams that demonstrate an understanding of key strategic and operational business elements which are apparent from this analysis are more likely to achieve their desired ratings outcome.
The market profile is a qualitative evaluation of a company’s spread of risk, revenue composition, and management strength. Given the qualitative nature of this analysis, management should provide a clear view of strategic plans and other elements which can provide a full picture of the company and how management approached the competitive landscape in its key markets.
A clear presentation of management’s plans to grow the company and improve operational efficiencies is essential to getting the appropriate rating for an organization. Sometimes there are areas where the goals of management and credit agencies are at odds. For example, a strategy to grow revenues and build the bottom line can be seen by the credit agency as a plan to add risk to the balance sheet. CFO Consulting Partners can work with the clients on how to best communicate the benefits of strategic actions and review strategies to mitigate the perceived risk.