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Twitter: @HRRATINGS
Methodology for Insurance Companies Methodology to rate the financial strength of insurance companies
May 24, 2017
Contacts
Helene Campech Manager Financial Institutions / ABS [email protected] Fernando Sandoval Executive Director Financial Institutions / ABS [email protected] Karla Rivas Vicepresident of Methodological Criteria [email protected] Felix Boni Managing Director Chief Credit Officer [email protected]
This methodology is the exclusive property of HR Ratings. This methodology replaces the Addendum - Rating Methodology for Insurance Companies, June 2013. *This methodology takes effect on May 24, 2017.
1 Jen México el organism del sector is
This methodology describes the analysis process to assess the financial strength of the entity, measuring its ability to settle claims on policies underwritten according to the entity’s obligations. Both qualitative and quantitative aspects are analyzed to obtain a rating. Insurance companies are one of the oldest and most diverse branches within the financial sector, focusing on providing their policyholders with adequate means to face the risks incurred. Insurance companies cover different categories or areas of operation, including life insurance products, accident and illness-related insurance products including personal accidents, major medical and health insurance, and damage insurance products including civil and professional liability, marine and transportation insurance, fire, vehicle, credit, catastrophic risks, among many others. This leads to a varied operating structure, where each type of insurance is operated specifically, responding to the needs and limitations of each product. All countries have their own bodies charged with regulating and monitoring the operation of the insurance industry, through the application of rules that foster the healthy development of the
companies operating in this industry1.
The methodology includes: 1) the HR Ratings rating process; 2) the different categories that influence and impact the rating assigned; 3) adjustment considerations (AC), and 4) the rating scale for insurance companies. HR Ratings describes the variables taken into account for the analysis of insurance companies and their ability to fulfill their obligations. It’s important to mention that the two categories considered in the initial analysis of financial strength are:
I. Qualitative category II. Quantitative category
Also described are each of the factors the categories consider, mentioning their impact on the initial rating (IR). The adjustment considerations (AC) are then assessed, which may require in a notch or multi-notch adjustment to the IC, taking into account extraordinary factors that may change the financial strength of the entity, resulting in the final rating (FR). The rating of the financial strength of insurance companies is based on information provided to HR Ratings by the company assessed, and other sources considered reliable. Ratings may be withdrawn on lack of information or when the information received is not transparent, clear or timely.
1 The Comisión Nacional de Seguros y Fianzas (CNSF) is the regulatory body for this sector in Mexico.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
General Structure of the Rating Process The HR Ratings methodology for rating insurance companies assesses the financial strength of the entity and measures its ability to settle claims on policies underwritten according to their contractual obligations. The methodology does not focus on any type of policy in particular, rather it looks at the overall ability of the insurance company to fulfill all its obligations. The HR Ratings methodology for insurance companies is also applicable for obligations contracted by insurance companies outside of their policy operations, therefore the ability to cover obligations in both the short and the long term is also analyzed. The rating assigned by HR Ratings aims to be of interest to buyers of insurance coverage, as it informs the customers of the insurance company of the company’s ability to meet in full its commitments on policies. Additionally, the rating assigned by HR Ratings aims to reflect the financial strength of insurance companies. Our rating process starts with gathering information from the insurance company. Once all the elements required have been collected, the information is then analyzed, compiling the committee packet presented to the HR Ratings Credit Analysis Committee. This Committee then issues an opinion on the financial strength of the insurance company. A fundamental part of the process includes arranging meetings with the management and operating team of the insurance company, to become familiar with their internal processes and premises, and to assess the experience of the team and their decision-making, among other things. Different topics are set for each meeting with management, which will include, at least, the accounting process, the policy underwriting process, and knowledge of risk management. The ratings assigned by HR Ratings are dynamic, therefore HR Ratings monitors the insurance company rated quarterly to ensure we have timely and sufficient information to make any changes necessary to the rating in the event the conditions improve or deteriorate. Regardless, ratings are reviewed at least once a year. The rating assigned to an insurance company is based on two categories of risk: qualitative and quantitative. The categories are comprised of different factors and each factor is given a weighted value according to its importance in determining the Initial Rating (IR). Additionally, there may be adjustment considerations (AC) to consider, which may result in notch or multi-notch adjustments to the IR, considering extraordinary factors that may influence the financial strength of the insurance company rated, to then determine the Final Rating (FR). For the first category, HR Ratings assigns a qualitative rating to each factor. This rating is associated with a numerical value, which is then multiplied by the respective weighting in the category, to then total this weighted result for the category and obtain a final numerical result for the qualitative category. Meanwhile, the factors considered in the quantitative category are based on a financial model. This model incorporates both public historic information and that which the insurance company provides to HR Ratings and which is used to prepare the projections for the current and following two years. The greater the differential between the current year and the future periods, the lower the weight given to the year.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
The factors considered in the quantitative category are drawn from the historic financial position, and from the results of the projections from a base scenario and a stress scenario. The historic indicators reflect the evolution of the company’s financial position. The base scenario represents the estimate prepared by HR Ratings in terms of the most probable evolution of the company’s financial position in the coming periods. This scenario will consider the information and forecasts provided by the company’s management team, which are incorporated as HR Ratings deems these feasible. The stress scenario assumes less favorable circumstances to those used in the base scenario. These assumptions are determined based on those used in the base scenario (for example, x% contraction in the underwriting of insurance premiums due to a greater competition, and less ability by customers to contract coverage, x% increase in claims, x% increase in the combined index due to higher costs of acquisition and overhead, among others). The stress scenario may also incorporate different assumptions that are particular to a specific entity. The result obtained for each metric is associated with its corresponding numerical rating, which is then multiplied by the weighting within the quantitative category, to then total the weighted result for each factor in the category and obtain the overall numerical rating for the quantitative category. Once the IR has been determined based on the qualitative and quantitative categories, the AC are assessed to determine the FR. The final adjustment may be one or more notches, to either improve or lower the IR. A predetermined individual relative weighting cannot be given for these extraordinary factors. The Credit Analysis Committee will determine the impact of each factor as neutral, positive or negative.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
Categories of financial strength
Categories of financial strength to rate insurance companies The methodology details the qualitative and quantitative categories to assess the risk factors affecting insurance companies. The qualitative risks are assessed in a non-measurable or subjective manner2, and are largely the product of the environment in which the entity operates. Meanwhile, the quantitative risks are drawn from the entity’s financial statements and are characterized as being measurable. The variables reflecting the quantitative factors are based not only on the information reported but also on the projections prepared by HR Ratings under base and stress scenarios. The categories of financial strength are given different weightings to obtain the IR. A. Qualitative
A1. Industry risk A2. Management assessment A3. Asset quality and counterparties A4. Accounting, actuarial, regulatory, legal and competition risk
2 The qualitative category considers the VAR in the Asset quality and counterparties, as although this is a measurable factor, it is not projected, therefore it cannot be included in the model for the quantitative category.
Fuente: HR Ratings
Calificación Inicial (CI)
Consideraciones de Ajuste (CA)
Periodo limitado de datos históricos
Apoyo explícito e implícito
Transparencia, calidad y oportunidad de la información
Otras situaciones específicas de calificación
Calificación Final (CF)
Tabla 1: Metodología para la Calificación de Instituciones de Seguros
Categoría Cualitativa
Categoría Cuantitativa
Situación Histórica Escenario Base Escenario Estrés
Limited period of historic data Explicit and implicit backing
Transparency, quality and timeliness of information Other specific rating situations
Source: HR Ratings
Base Scenario
Adjustment Considerations (AC)
Final Rating (FR)
Historic Position Stress Scenario
Table 1: Methodology for rating insurance companies
Initial Rating (IR)
Quantitative Risks
Qualitative Risks
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
B. Quantitative B1. Level of profitability B2. Operating efficiency B3. Solvency B4. Liquidity risk
Qualitative Risks The qualitative category includes the following risk factors: 1) Industry risk, 2) Management risks (assessment), 3) Asset quality and counterparty risks, and 4) Accounting, actuarial, regulatory, legal and competition risks. Given the nature of the category, the rating assigned by HR Ratings is determined based on the different factors observed, to then be transformed into a numerical rating and added into the IR. This category includes factors not only related to the growth expectations of the industry and the management of the business, but also regulatory risks, among others. The following steps are taken to obtain the rating for this category: i. HR Ratings receives information from the insurance company and the public information available. ii. Meetings are scheduled with management and the strategic and operational areas of the company to specifically identify the level of risk to which the company is exposed from a qualitative perspective. iii. Given the nature of the qualitative risks, HR Ratings assigns a qualitative rating to each of the factors reflecting the current situation of the company and the assessment prepared by the analyst. The principal risk factors included in the qualitative category are described following and details are provided for the key points considered to assign the qualitative rating.
A1. Industry Risk This factor is comprised of four areas: A1a) industry growth outlook; A1b) market share; A1c) market positioning (important to determine the capacity to resist periods of uncertainty), and A1d) technological trends (which could impact costs, competitiveness and growth). A1a. Industry growth outlook This factor sets the growth outlook for the industry for the next two years. It defines the level of importance of the sector in the country’s economic activity and looks at this performance. This factor distinguishes the economic variables and indicators with the greatest weight in the performance of the sector to correctly ascertain the market. The most important points analyzed in this area are: A. Historic evolution of the economy. B. Estimate of the demand for the services the company analyzed offers. C. Behavior of the sector in relation to the economy. D. Analysis of the regional, national and international competition.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
This point will not only be considered for the qualitative analysis, it will also represent the basis for the scenarios run for the quantitative analysis. The variables in the HR Ratings financial model will be stressed according to the economic growth outlook, among other things, therefore it will be fundamental to establish the growth rhythm expected for the economy and the impact on the sector in which the insurance company specializes. It’s important to mention that also under this section, an analysis is performed distinguishing between insurance companies engaged in life insurance, medical insurance, casualty insurance, or any other, analyzing each sector individually. A1b. Market share This category identifies the market share of the insurance company versus its competitors, taking as reference the total current policies held against the policies of the sector. A1c. Market positioning This line refers to the image that customers have of the products and services the insurance company offers, which is not necessarily linked to the company’s market share. Many insurance companies, despite having a low market share, can achieve the respect and recognition of customers in areas of quality and service. This line assesses the strengths and weaknesses of the insurance company in terms of the competition, considering aspects such as: prices of policies offered, response times, types of insurance, and contract conditions, among others. A1d. Technological trends This category looks at the technological changes in the industry, identifying whether such changes would increase the cost structures of the entities.
A2. Management assessment The management assessment is one of the key parts of the qualitative analysis to determine the rating for the insurance company. For this indicator, HR Ratings focuses on examining the organizational structure, personnel policies, company processes in relation to measuring risks and generating technical reserves, the existence of manuals to determine this sensitivity, internal control manuals, and the quality of management, among others. The management assessment is comprised of the following areas: A2a) risk management, A2b) concentration, A2c) organizational structure, A2d) corporate governance practices, and A2e) record and vision of the insurance company and senior management. A2a. Risk management The systematic identification of risks both inside and outside the company, and also knowledge of the steps necessary to reduce these risks, are seen as positive factors. Meanwhile, a propensity for taking risky or speculative positions and operating with low rated counterparties will be viewed negatively for the assignment of a qualitative rating. However, it’s important to mention that HR Ratings includes in this analysis, regulations on the investments held by insurance companies, which limit, to a certain extent, the risk that may be incurred. The specific sensitivity of the insurance company to market and operational risk is analyzed in detail in the quantitative category, therefore the purpose of this line is to identify the
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
reaction of management to stress situations and the risks involved in the management of the company. This area also examines the controls and processes the company has in place to measure and control its risks. This includes generating additional reserves and position in company investments on the reserves. The policy on increasing policies and premiums through different economic cycles is also examined. HR Ratings views positively the existence of underwriting manuals and underwriting committees that properly handle the risks through the company’s operations. A2b. Concentration risk In terms of concentration risk, HR Ratings assesses the risk management and the policies and strategies set by the company management to avoid a high level of concentration risk. HR Ratings defines concentration as generating policies and/or premiums linked to the same risk factors, customers and/or geographical zones, and which could have a considerable monetary impact if they were to occur. HR Ratings assesses the concentration risk based on the real risk held by the company, considering what it has ceded to another insurance company. A2c. Organizational structure An organizational structure that has a clear demarcation of functions is viewed positively. The presence of qualified and experienced personnel holding key positions is also a positive factor. Meanwhile, HR Ratings will view centralized decision-making negatively. An internal structure that is too vertical, so as to impede communication between senior management and employees, will be assessed negatively in the HR Ratings analysis as this can affect the operation of the company. Additionally, HR Ratings will assess positively personnel policies that focus on retaining talented employees and encourage their growth along with that of the company. In addition to considering the internal organizational structure, which includes key personnel within the insurance company, HR Ratings will consider the corporate structure of which the company is a part, meaning the relationship the company has a member of a group, or any other institution of which it is a part. The relationship between the entities is analyzed and also the influence of one entity over. HR Ratings also analyzes the form of operations in terms of the Investment Committee and the Underwriting Committee (where this is the case). This is because of the importance of both committees in the operation of the company and the company’s ability to fulfill its contractual obligations. A2d. Corporate governance practices This area analyzes the corporate policies that promote transparency in decision-making, including the course of transactions and negotiations with other groups. Potential conflicts of interest between the different areas of the company are analyzed in detail, mentioning the strategies adopted to reduce these risks. The structure of the Board of Directors is also analyzed, as well as the number of independent board members and their experience. HR Ratings looks at the existence, structure and operation of the committees, as these lend greater grounds and solidity to decision-making within the insurance company.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
The existence of manuals and policies adhering to the regulations to which the company is subject is analyzed and confirmed; and also the company’s internal control mechanisms to ensure the members of the company comply with the manuals and policies. A2e. Record and vision of the insurance company and senior management HR Ratings also considers the record of the company’s management in terms of initiatives for growth and the ability to meet goals. HR Ratings analyzes in detail the company’s strategy in terms of markets and growth. It’s important to consider the competency of management in terms of the composition of the management team and decision-making. The area evaluates the existence of a well-structured business plan and strategic plans.
A3. Asset quality and counterparties The asset quality and counterparties factor incorporates into the rating the risks that may be incurred on holding investments in securities or with counterparties that may default on their obligations with the insurance company. Counterparties include, primarily, the reinsurers with which the entity operates. This factor includes two areas: A3a) Asset quality, and A3b) Quality of counterparties and reinsurers. A3a. Asset quality The asset quality is observed through the investments in securities the company holds, which is determined by analyzing the ratings assigned to these investments, their liquidity and the possibility of impairment. Specifically, HR Ratings examines the handling of the VAR3 by the insurance company in terms of the investments held. It’s important that the company respect the established VAR limits and not cross this threshold during any period. A3b. Quality of counterparties and reinsurers HR Ratings evaluates the strength of the different counterparties and reinsurers with which the entity operates to determine their quality. This assessment incorporates the risk the counterparties may default on their obligations, which may affect the entity. HR Ratings considers the risk ratings held by the counterparties, and also any impairment. HR Ratings uses the internal counterparty rating, where possible, or the market rating.
A4. Accounting, actuarial, regulatory, competition and legal risk This factor is comprised of the following areas: A4a) accounting, A4b) actuarial, A4c) regulatory, A4d) national and international competition, and A4e) legal. A4a. Accounting HR Ratings analyzes the insurance company’s adherence to the accounting standards set by the regulatory body in each country or entity. Constant change in accounting policies and financial reporting with unreliable information are considered negative factors.
3 VAR is a measure of risk used broadly for the market risk associated with an investment portfolio of financial assets.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
A4b. Actuarial The insurance sector depends significantly on actuarial estimates to ensure the institution has sufficient resources to fulfill its obligations. Based on this, consideration is given to the actuarial report of the insurance company prepared by an independent firm. A4c. Regulatory The insurance sector is monitored and regulated by the authorities in each country or entity. In this regard, HR Ratings assesses the company’s adherence to the national regulatory measures, paying particular attention to the minimum levels in terms of the indicators required, and also compliance with the standards related to the operation of insurance companies (including the types of operations permitted and prohibited). The result of this analysis is also taken into consideration in the quantitative indicators. A4d. National and international competition For HR Ratings, it’s important to consider the possibility that new local or foreign companies may enter or withdraw from the competition in the local market. Competition is assessed from the perspective that the segment of insurers analyzed may be affected by the entry of new competitors. A4e. Legal HR Ratings analyzes the potential impact that may be observed on the company in the event any open legal action or proceeding is resolved for or against the company, taking into consideration the probably that any such action will be resolved one way or another, and also the company’s reserves to settle such obligations, where necessary.
Quantitative Risks The factors included in this category are quantitative in the sense that they yield numerical values obtained from the financial model. HR Ratings evaluates the company through its historic information and two projection scenarios, base and stress, to obtain the rating for the quantitative category. The principal metrics assessed are described through the following factors: 1) Level of profitability, 2) Operating efficiency, 3) Solvency, and 4) Liquidity risk. The factors considered to obtain the rating for the quantitative risks are described following.
B1. Level of profitability The metrics calculated for this area are essential to establish the company’s level of profitability, based on its ability to generate profits from generating policies. It should be noted that a high level of profitability may imply a higher level of risk (depending on the specific circumstances), and therefore, may become a factor that could lower the rating. The level of profitability for an insurance company is obtained according to the following metrics: B1a) Gross margin, B1b) Average ROA, B1c) Average ROE, and B1d) Active investment rate.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
B1a. Gross margin First we have the gross margin, which reflects the ability to generate income through the premiums collected over 12 months, discounting the claims cost, the generation of reserves and the cost of acquisition. Here, income refers to the total issued premiums less reinsurance operations. B1b. Average ROA The 12-month average return on assets is a metric used in the analysis of the insurance company’s profitability. The objective is to evaluate the profitability by identifying the net earnings generated over a twelve-month period in terms of the company’s 12 months average total assets. B1c. Average ROE The 12-month average return on equity measures the profitability of the company by breaking down the net earnings generated during a period, divided by the average total capital. Information for the last twelve months is used for evaluating the earnings generated by the company4. B1d. Active investment rate The active investment rate is defined as the difference between the yield rate on investments over the last 12 months less the reference rate.
B2. Operating efficiency The operating efficiency indicators are essential in determining the efficient use of resources and cost management. Here, HR Ratings seeks to identify the insurance company’s efficiency in managing expenses in relation to the premiums issued and the current policies. The insurance company’s operating efficiency is analyzed through the following indicators: B2a) Combined index, and B2b) Net loss index. B2a. Combined index The combined index is used as a general indicator of performance and efficiency. It is obtained from the sum of the acquisition index, the claims index and the operating index, which are detailed following. B2a.1 Acquisition index The acquisition index is the result from dividing the net cost of acquisition by the retained issued premiums over a period of 12 months. The net cost of acquisition records the commissions and compensations paid to the agents and brokers for the sale of policies, reinsurance commissions and excess loss coverage. Meanwhile, the retained issued premiums are the premiums corresponding to the policies underwritten by an insurer, less the part ceded to another entity. B2a.2. Claims index The claims index is the result of dividing the net claims cost by the retained earned premiums over a period of 12 months.
4 It’s important to note that a high ROE may be caused by a low level of solvency.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
The net claims cost is the expenses incurred by the insurance company associated with events that cause damages covered by the policy up to a certain insured sum (claims), the claims adjustment expenses, among others; generated over a certain time period set in the policy or group of policies. The retained earned premiums are the retained premiums less the change in outstanding reserves generated over a certain time period. B2a.3 Operating index The operating index is the result of dividing the operating expenses by the direct issued premiums over a period of 12 months. The operating expenses line includes all the expenses incurred by the company to operate its business. The direct issued premiums are the premiums corresponding to the policies underwritten by an insurer directly, meaning exclusive of those taken in reinsurance.
B2b. Net loss index The net loss index is based on identifying the real amount of the company’s claims obligations based on the generation of retained issued premiums. Meaning, the claims rate on the total issued premiums is considered for the calculation less the claims rate corresponding to the premiums ceded. This indicator takes the claims rate for the last 12 months against the retained issued premiums for the same period.
B3. Solvency The metrics included in the solvency category reflect the ability of management to adequately manage insurance losses, without impairing the operation so as to affect its level of risk and, therefore, its rating. The analysis of the indexes considers the possibility these metrics may be temporarily high due to a recent increase in capital, instead of an improvement in the generating of profits. The solvency of the company is measured according to: B3a) Capital to technical reserves, B3b) Solvency capital requirement coverage index, and 35c) Minimum paid capital coverage index. B3a. Capital to technical reserves The capital to reserves is calculated based on the ratio of capital to total technical reserves. This gives a relative measure of the capital against the company’s obligations. B3b. Solvency capital requirement coverage index The solvency capital requirement coverage index indicates the level of admissible own funds necessary that the insurance company must hold to back the solvency capital requirement set by the regulator in the country or entity, considering the current policiesand all the risks to which each policy is exposed (underwriting risk, re-bonding, market, imbalance between assets and liabilities, liquidity, credit, concentration and operational risk). B3c. Minimum paid capital coverage index The minimum paid capital coverage index indicates the minimum capital requirement set by the regulator in the country or entity based on each type of operation, branch or category the company is authorized to operate.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
B4. Liquidity risk A healthy liquidity is essential for the operation of an insurance company as it determines the ability of the insurance company to settle its obligations through its investments. In this methodology, the liquidity risk is measured through the following ratio: B4a) Investment base coverage index. B4a. Investment base coverage index The investment base coverage index measures the amount of investments available to cover the outstanding techincal reserves, the reserves for contractual obligations and the contingency reserves. This indicates that a better position in investments shows a greater coverage capacity to settle obligations.
Adjustment considerations Once the IR has been determined based on the qualitative and quantitative categories of risk, the adjustment considerations (AC) are added in to determine the FR. The final adjustment may be one or more notches to either improve or lower the IR. A predetermined relative individual weighting cannot be given for these extraordinary factors. The Credit Analysis Committee will determine the impact of each factor as neutral, positive or negative. Extraordinary adjustment considerations are:
Limited period of historic data This methodology assumes the existence of five years of historical data to serve as the basis for preparing projections. However, if the historic data are not complete, the context of the insurance company will be analyzed to determine whether the information available is sufficient to be able to carry out the rating process. The IR may be adjusted to include greater risk due to the lack of information.
Explicit and implicit support An entity may be linked to a group (parent company, holding company, subsidiary or affiliate, among others) with greater financial strength that may provide backing (explicit or implicit) in times of stress. However, on occasion, the entity may be linked to a group that is weaker or weakening and shareholders may decide to transfer their resources out of the entity being rated to the weaker parties in the group. Given these situations, the backing of a group could increase the rating level for the company, or on the contrary, the relationship with a weak group could pressure the rating. HR Ratings determines the backing by analyzing the regulation and the different variables involved (for example, assessment of the economic relationship between the entity providing the backing and the insurance company rated, ownership and control, total or partial, strategic importance of the company in the business plans of the group, brand, percentage of revenue the company represents for the group, among others). This factor also considers any potential government backing.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
Transparency, quality and timeliness of information According to the General Methodological Criteria, applicable to all classes of assets rated by HR Ratings, throughout the time the entity is rated, the analysis team will assess the clarity and timeliness of the information received, and also the availability and professionalism of the persons responsible for delivering this information to HR Ratings.
Other specific rating situations This is included to give the Credit Analysis Committee the flexibility necessary to incorporate other risk factors not specifically included previously. This consideration also allows, in very specific situations, for a rating factor to be so important to the financial position and solvency of a company that it may increase the weighting, despite this weighting already being established.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
Rating Scale
Long Term Rating Scale
Symbol Definition
HR AAA
The insurance company assigned this rating is considered to offer the highest certainty for timely payment of obligations, maintaining a minimum risk of default.
HR AA
The insurance company assigned this rating is considered to offer a high certainty for timely payment of obligations, maintaining a very low risk of default under adverse economic scenarios.
HR A
The insurance company assigned this rating offers acceptable certainty for timely payment of contracted obligations, maintaining a low risk of default under adverse economic scenarios.
HR BBB
The insurance company assigned this rating offers moderate certainty for timely payment of contracted obligations, with weakness in the ability to pay under adverse economic changes.
HR BB
The insurance company assigned this rating offers insufficient certainty for timely payment of contracted obligations, maintaining a high risk of default.
HR B
The insurance company assigned this rating offers low certainty for timely payment of contracted obligations, maintaining a high risk of falling into default.
HR C The insurance company assigned this rating offers a high probability of falling into default on the payment of contracted obligations.
HR D
This is the lowest rating on the scale and is assigned to insurance companies that are in default or which HR Ratings believes will not make timely and full payment of their contractual obligations.
As there is a wide range of possible specific characteristics for insurance companies and considering that ratings are expressed based on a limited number of symbols, HR Ratings assigns “+” or “-“ from HR AA to HR C, to positions of relative strength or weakness (where necessary) within each rating scale.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
Short Term Rating Scale
Symbol Definition
HR1
The insurance company assigned this rating offers a high ability to make timely payment on obligations. Insurers in this category with a relative superiority in their ability to pay will be assigned the rating HR+1.
HR2
The insurance company assigned this rating offers an acceptable ability to make timely payment on obligations due in the short term, and maintains a greater risk of default compared with higher rated insurers.
HR3
The insurance company assigned this rating offers a moderate ability to make timley payment on obligations in the short term, and maintains a greater risk of default compared with higher rated insurers.
HR4
The insurance company assigned this rating offers an insufficient ability to make timley payment on contracted obligations in the short term. The insurance company is susceptible to fall into default.
HR5
The insurance company assigned this rating has defaulted on its obligations or it is highly probable the insurance company will fall into default.
HR D
This is the lowest rating on the scale and is assigned to insurance companies that are in default or which HR Ratings believes will not make timely and full payment of their contractual obligations.
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Methodology for Insurance Companies Rating methodology for insurance companies
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Appendices Appendix – Financial Metrics
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Methodology for Insurance Companies Rating methodology for insurance companies
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Glossary Underwritten premiums The policies underwritten by an insurer over a certain period. The sum of the direct issued premiums and the premiums taken. Direct issued premiums The premiums corresponding to the policies underwritten by an insurer directly, meaning exclusive of those taken in reinsurance. Premiums taken The premiums corresponding to policies underwritten by another insurer that the entity rated takes in reinsurance. Retained issued premiums Premiums corresponding to policies written by an insurer, less the part ceded to another entity. Retained earned premiums Retained premiums less the change in outstanding reserves over a certain period of time. Claims cost The expenses incurred by the insurance company associated with events causing damages covered by the policy up to a certain insured sum (claims), the claims adjustment costs, among others, and which are generated over a time period determined in the policy or group of policies. Cost of acquisition The cost of acquisition records the commissions and compensations paid to agents and brokers for the sale of policies, reinsurance commissions, and excess loss coverage. Operating expense The operating expense line includes all expenses incurred by the company to operate its business. Technical reserves Represent the estimate of the sum of the outstanding technical reserves, the reserves for contractual obligations and the contingency reserves. Outstanding technical reserves Represent the estimate of the obligations associated with insurance contracts for established risks that have not occurred as of the reporting date and are expected to occur during the term remaining on the contracts. Reserves for contractual obligations Represent the estimate of the obligations associated with claims and maturities, claims occurred and not reported, deposited premiums, among others. Contingency reserves Represent the estimate of the obligations associated with catastrophic risks.
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Methodology for Insurance Companies Rating methodology for insurance companies
May 24, 2017
Mexico: Avenida Prolongación Paseo de la Reforma #1015 torre A, piso 3, Col. Santa Fe, México, D.F., CP 01210, Tel 52 (55) 1500 3130. USA: One World Trade Center, Suite 8500, New York, New York, ZIP Code 10007, Tel +1 (212) 220 5735. HR Ratings de México, S.A. de C.V. (HR Ratings), is a securities rating agency authorized by the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores (CNBV)), registered with the U.S. Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NRSRO) for public finance assets, corporates and financial institutions, as described in Section 3(a)(62)(A) article (v) of the U.S. Securities Exchange Act of 1934, and certified as a Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA).
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