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A.M. Best A.M. Best Company'sCompany's
Insurance Market Insurance Market
BriefingBriefingCanadaCanada
P&CP&C Joseph Burtone Assistant Vice President
September 8, 2010
AgendaAgenda
Rating ComponentsRating Components Canada P/CCanada P/C
A.M. Best Rating A.M. Best Rating DefinitionsDefinitions
Financial Strength Rating (FSR)
ICR to Debt Notching / Holding
Co.
FSR to Credit Market Scale / ICR
A.M. Best’s Issuer Credit Rating (ICR) is an opinion of an issuer/ entity’s ability to meet its ongoing senior financial obligations.
A.M. Best’s Financial Strength Rating is an independent opinion of an insurers financial strength and ability to meet its ongoing policy and contract obligations.
A.M. Best’s Debt Rating is an opinion of an the issuer/entity’s ability to meet its ongoing financial obligations to security holders when due.
Operating Insurance Co.
Guide To Best's Financial Guide To Best's Financial Strength RatingsStrength Ratings
B, B- FairC++, C+ MarginalC, C- WeakD PoorE Under Regulatory SupervisionF In Liquidation
Vulnerable Ratings
Secure Ratings
A++, A+ SuperiorA, A- ExcellentB++, B+ Good
FSR & ICR FSR & ICR EQUIVALENTSEQUIVALENTS
FSR ICR
Se
cure
Inve
stm
en
t G
rad
e
A++ aaaaa+
A+ aaaa-
A a+a
A- a-
B++ bbb+bbb
B+ bbb-
FSR ICR
Vu
lne
rab
le
No
n-I
nv
es
tme
nt
Gra
deB bb+
bb
B- bb-
C++ b+b
C+ b-
C ccc+ccc
C-ccc-cc
A.M. Best’s Rating EvaluationA.M. Best’s Rating EvaluationKey ComponentsKey Components
Balance Sheet Strength
Operating Performance
BusinessProfile
Best’s Rating
Balance Sheet StrengthBalance Sheet Strength
Risk Adjusted Capitalization (BCAR)Risk Adjusted Capitalization (BCAR) Foundation for financial securityFoundation for financial security LeverageLeverage Quality/Soundness of reinsuranceQuality/Soundness of reinsurance Adequacy of loss reservesAdequacy of loss reserves Quality/Diversification of assetsQuality/Diversification of assets LiquidityLiquidity
Best’s Capital Adequacy Best’s Capital Adequacy Model (BCAR)Model (BCAR)
A quantitative tool that indicates whether a A quantitative tool that indicates whether a company’s capital is appropriate for a company’s capital is appropriate for a particular rating level. BCAR by itself never particular rating level. BCAR by itself never has been the sole basis for determining any has been the sole basis for determining any Best’s Credit Rating.Best’s Credit Rating.
Important to A.M. Best’s evaluation of both Important to A.M. Best’s evaluation of both absolute and relative capital strengthabsolute and relative capital strength
It is expected that well managed and highly It is expected that well managed and highly rated companies maintain excess capital rated companies maintain excess capital
Trends are keyTrends are key
Operating Performance Operating Performance A.M. Best analysis centers on the stability and
sustainability of the company’s earningsAreas reviewed when analyzing operating performance: Underwriting, Investments Capital gains/losses Pre-tax and total operating earnings Underwriting ratio, operating ratio
Volatility is a considerationVolatility is a consideration Projections & TrendsProjections & Trends
Business Profile Business Profile Business profile is the qualitative component of Business profile is the qualitative component of
Best’s rating evaluation Best’s rating evaluation Key areas of business profile Key areas of business profile
spread of risk – geographic, product & spread of risk – geographic, product & distributiondistribution
Revenue compositionRevenue composition Competitive market positionCompetitive market position Depth and experience of managementDepth and experience of management
Drives current and future operating performance Drives current and future operating performance and may impact long-term financial strengthand may impact long-term financial strength
Risk ManagementRisk Management Risk management is the common thread that Risk management is the common thread that
links balance sheet strength, operating links balance sheet strength, operating performance and business profile performance and business profile
Where there is risk, there is uncertainty and Where there is risk, there is uncertainty and where there is uncertainty there is exposure to where there is uncertainty there is exposure to volatilityvolatility
It’s not risk avoidance, it’s risk managementIt’s not risk avoidance, it’s risk management Fundamental objective of a sound risk Fundamental objective of a sound risk
management is to manage organizations management is to manage organizations exposure to potential earnings and capital exposure to potential earnings and capital volatility and maximize value to the organizations volatility and maximize value to the organizations various stakeholdersvarious stakeholders
A.M. Best’s Rating Perspective - A.M. Best’s Rating Perspective - Bringing it all TogetherBringing it all Together
Capital strength is the foundation of all ratingsCapital strength is the foundation of all ratings Sustained, stable operating profitability ensures Sustained, stable operating profitability ensures
future strengthfuture strength Business profile is the qualitative component that Business profile is the qualitative component that
impacts the quantitative measuresimpacts the quantitative measures Well-diversified, strong business profile ensures Well-diversified, strong business profile ensures
stability and profitabilitystability and profitability
Canada Property / Canada Property / CasualtyCasualty
Overview of Canadian P&C Overview of Canadian P&C IndustryIndustry
Market is stableMarket is stable Capitalization remains strong – Capitalization remains strong –
enhanced by net income and enhanced by net income and unrealized investment gainsunrealized investment gains
Profitable, but declining earningsProfitable, but declining earnings Challenges in underwriting offset by Challenges in underwriting offset by
gains in financial marketsgains in financial markets Overall, companies acting prudentlyOverall, companies acting prudently
Canadian P&CCanadian P&CRisk Adjusted CapitalizationRisk Adjusted Capitalization
Weighted average BCAR score is strong up 12% at year Weighted average BCAR score is strong up 12% at year end ’09end ’09
Adversely impacted by investment markets in 2008Adversely impacted by investment markets in 2008Best Capital Adequacy Ratio (BCAR)
Weighted Averages
216.5
221.8
200.0
224.0
190.0
200.0
210.0
220.0
230.0
2006 2007 2008 2009
Year
Canadian P&CCanadian P&CRegulatory CapitalRegulatory Capital
2009 weighted average MCT score virtually 2009 weighted average MCT score virtually unchanged from 2008. BAAT score down 5.3%.unchanged from 2008. BAAT score down 5.3%.
Weighted Average BAAT & MCT(excluding ICBC and Lloyds CAB)
588.3 585.2 605.1572.9
309.0 268.3268.2283.3
200.0
300.0
400.0
500.0
600.0
700.0
2006 2007 2008 2009
Year
We
igh
ted
Ave
rag
e
Baat MCT
Canadian P&CCanadian P&CA.M. Best Financial Strength Rating A.M. Best Financial Strength Rating
Ratings DistributionRatings Distribution(Interactive Ratings Only)(Interactive Ratings Only)
Ratings have remained relatively consistent with little movement between rating categories.Ratings have remained relatively consistent with little movement between rating categories. 97% of rating units have secure ratings of which 79% were rated Excellent or Superior at YE 2009.97% of rating units have secure ratings of which 79% were rated Excellent or Superior at YE 2009.
5%
19%
47%
29%
6%
13%
52%
29%
3%
15%
49%
34%
4%
14%
51%
31%
4%
14%
53%
29%
3%
17%
48%
31%
YE 2005 YE 2006 YE 2007 YE 2008 YE 2009 June 30 2010
Vulnerable Good Excellent Superior
Canadian P&CCanadian P&CNet IncomeNet Income
2009 Net Income driven by investment gains and 2009 Net Income driven by investment gains and lower underwriting losses lower underwriting losses June 2010 Net Income approx. C$1.7 billionJune 2010 Net Income approx. C$1.7 billion
(excluding ICBC and Lloyds CAB)
4.6
5.14.9
2.12.4
1.7
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2005 2006 2007 2008 2009 2010_06
Year
C$ B
illio
ns
Canadian P&CCanadian P&CPre-tax ReturnsPre-tax Returns
Positive but declining returns through 2009Positive but declining returns through 2009 Driven by underwriting losses and lower Driven by underwriting losses and lower
investment returnsinvestment returnsPre-Tax Return on Equity and Revenue
(excluding ICBC and Lloyds CAB)
20.4 20.9 18.510.1 9.0 6.1
16.39.7 8.5 5.9
17.218.1
0.0
10.0
20.0
30.0
2005 2006 2007 2008 2009 2010_06
Year
Perce
nt
ROE ROR
Canadian P&CCanadian P&COperating RatiosOperating Ratios
Ratio below 100 reflective of profitability from combined underwriting Ratio below 100 reflective of profitability from combined underwriting and investment income without capital gains/lossesand investment income without capital gains/losses
(excluding ICBC and Lloyds CAB)
82.383.1
90.791.8
88.3
84.0
75.0
80.0
85.0
90.0
95.0
2005 2006 2007 2008 2009 2010_06
Year
Opera
ting R
atio
Canadian P&CCanadian P&CUnderwriting RatiosUnderwriting Ratios
Ratio below 100 indicative of profitable underwritingRatio below 100 indicative of profitable underwriting Underwriting expenses consistent over last five years ranging Underwriting expenses consistent over last five years ranging
between 28.9 and 30.5 points to the underwriting ratiobetween 28.9 and 30.5 points to the underwriting ratio 2008 and subsequent due to higher Net Loss and LAE ratios2008 and subsequent due to higher Net Loss and LAE ratios
(excluding ICBC and Lloyds CAB)
92.491.5
93.2
101.2 100.9
97.8
85.0
90.0
95.0
100.0
105.0
2005 2006 2007 2008 2009 2010_06
Year
Underw
riting R
atio
Canadian P&CCanadian P&CNet Loss and LAE RatiosNet Loss and LAE Ratios
Increase in 2008 and subsequent years due to;Increase in 2008 and subsequent years due to; More frequent and severe weather and fire lossesMore frequent and severe weather and fire losses Auto personal accident claims cost inflationAuto personal accident claims cost inflation Less favorable reserve development on prior accident Less favorable reserve development on prior accident
yearsyears
(excluding ICBC and Lloyds CAB)
63.562.0
63.4
70.7 70.7
67.7
55.0
60.0
65.0
70.0
75.0
Year
Net
Loss &
LA
E R
atio
Canadian P&CCanadian P&CAutomobileAutomobile
Personal accident net loss ratio up to 137.6 @ YE 09 and risingPersonal accident net loss ratio up to 137.6 @ YE 09 and rising Ontario auto reform – implementation 9/1/10Ontario auto reform – implementation 9/1/10 Creates concerns regarding pricing, reserving, profitability, consumer confidence.Creates concerns regarding pricing, reserving, profitability, consumer confidence.
Net Loss and LAE Ratio Trend(private insurers only)
68.6
80.4
94.6
116.6
137.6 141.3
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
2005 2006 2007 2008 2009 2010_06
Year
Ne
t L
oss a
nd
LA
E R
atio
Auto - Liability Auto - Personal Accident Auto - Other
Canadian P&CCanadian P&CPersonal PropertyPersonal Property
Frequency and severity upFrequency and severity up Intense wind, hail, rain, water damage claimsIntense wind, hail, rain, water damage claims Industry recognizing insurance to value (ITV), aging infrastructure, competitive pricing are Industry recognizing insurance to value (ITV), aging infrastructure, competitive pricing are
concernsconcerns
Net Loss and LAE Ratio Trend(excluding ICBC and Lloyds CAB)
69.566.4 66.7
75.8 75.9
59.2
50.0
55.0
60.0
65.0
70.0
75.0
80.0
2005 2006 2007 2008 2009 06_2010
Year
Net
Loss a
nd L
AE
Ratio
Canadian P&CCanadian P&CCommercial PropertyCommercial Property
Competitive pricing persistsCompetitive pricing persists No signs of significant rate hardeningNo signs of significant rate hardening Retentions up slightlyRetentions up slightly
Net Loss and LAE Ratio Trend(excluding ICBC and Lloyds CAB)
64.3
52.1
56.2
66.2
64.2
68.2
50.0
55.0
60.0
65.0
70.0
2005 2006 2007 2008 2009 06_2010
Year
Net
Loss &
LA
E R
atio
Canadian P&CCanadian P&CInvestment IncomeInvestment Income
Realized capital gains pulled up total investment incomeRealized capital gains pulled up total investment income Continued low interest rates, potentially lower dividend and interest Continued low interest rates, potentially lower dividend and interest
income in 2010income in 2010 Sell off of equities in 2008 reversing for potentially higher returnsSell off of equities in 2008 reversing for potentially higher returns
Investment Income Trend(excluding ICBC and Lloyds CAB)
0.2
2.6 2.93.3 3.3
3.1
1.9
0.2
-0.5
1.1 1.01.2
3.74.1 4.3
2.8
3.3
2.1
-1.00.01.02.03.04.05.0
Year
C$
Billio
n
NII R G/(L) Total Inv Income
Canadian P&CCanadian P&CComposition of Invested AssetsComposition of Invested Assets
C$86.9 billion invested at YE 2009C$86.9 billion invested at YE 2009 C$74.4 billion (85.6%) in conservative, highly rated fixed income C$74.4 billion (85.6%) in conservative, highly rated fixed income
securities and cashsecurities and cash C$9.8 billion (11.3%) in common and preferred sharesC$9.8 billion (11.3%) in common and preferred shares Slight movement back to equitiesSlight movement back to equities
Non Aff iliated Invested AssetsCanadian P&C
As of Dec. 31, 2009(excludes ICBC & Lloyds CAB)
Comm. Shrs.7.3%
Pref. Shrs.4.0%
Other2.4%
RE / Mort0.7%
Trm Dep, Bnds & Debents.
80.8%
Cash4.8%
Canadian P&CCanadian P&CMarket ReviewMarket Review
Capitalization strengthened and continues to Capitalization strengthened and continues to support a stable rating environmentsupport a stable rating environment
Earnings up slightly and expected to remain positiveEarnings up slightly and expected to remain positive Underwriting challengesUnderwriting challenges
Uncertainty of benefits to be derived from auto reforms in Uncertainty of benefits to be derived from auto reforms in OntarioOntario
Competitive commercial lines pricingCompetitive commercial lines pricing Rising property damage losses from storms and fireRising property damage losses from storms and fire Aging infrastructureAging infrastructure Regulatory interventionRegulatory intervention
Below average investment returns anticipated in the Below average investment returns anticipated in the near termnear term Putting additional pressure on underwriting disciplinePutting additional pressure on underwriting discipline
Canadian P&CCanadian P&CMarket Outlook 2010Market Outlook 2010
Industry is stableIndustry is stable Capitalization expected to remain Capitalization expected to remain
strongstrong Not anticipating significant number Not anticipating significant number
of rating actionsof rating actions Earnings expected to remain positive Earnings expected to remain positive
but not robust due to underwriting but not robust due to underwriting and investment challengesand investment challenges
A.M. Best remaining cautious on A.M. Best remaining cautious on benefits of auto reforms.benefits of auto reforms.
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