A.M. Best Special Report: How Metrics Correlate to A.M. Best’s Life & Annuity Ratings

OLDWICK, N.J.--()--A.M. Best recently examined the rating distribution and associated metrics within rating categories among U.S. life and annuity insurers and concluded a company exhibiting strong performance over time will generate earnings sufficient to maintain prudent levels of risk-adjusted capital. Strong performers are those companies whose earnings are relatively consistent and deemed to be sustainable.

A new Best Special Report, titled, “How Metrics Correlate to A.M. Best’s Life & Annuity Ratings,” states that the 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 criteria. Additionally, A.M. Best utilizes various benchmarking tools to get a more detailed comparison of the overall performance and volatility of rating units within certain business segments, peer comparisons and rating categories using various financial measures and metrics, providing micro- and macro-level views.

The higher the rating, the stronger the balance sheet strength, the better the company’s operating performance and the stronger/more diverse the business profile. Companies with a stable track record and better than average earnings generation may receive higher ratings and lower risk-adjusted capital relative to their peers. On the other hand, there was an inverse correlation between rating level and volatility, with the lower-rated companies exhibiting more overall volatility.

With the number of statutory-filing life and annuity rating units varying between 278 and 298 from 2011-2014, the rating ranges have been fairly consistent over the last four years. However, A.M. Best notes that there has been a slight migration up the credit scale as the “Excellent” (issuer credit ratings of “a-” through “a+”) category has trended upward in population size while ratings in the “Fair & Below” (issuer credit ratings of “bb+” and lower) category have trended slightly downward. The last four years have represented a relatively benign environment for life and annuity writers. Despite ongoing growth challenges and continued low interest rates, the generally positive trend in the equity markets and the favorable credit environment for investments has allowed many companies to deliver stronger earnings and to realize higher capital ratios. This has led to a modest number of rating upgrades.

Profitability is a leading indicator when measuring future balance sheet strength and long-term financial stability. For an insurer to remain viable in the marketplace, that insurer must perpetuate a financially strong balance sheet, which in turn is dependent upon the stability and sustainability of the company’s sources of earnings in relation to the liabilities the company retains. The sustainability of earnings over the long-term is a particularly important consideration for life insurance companies, as many of their liabilities are long-tail in nature, requiring that the company remains viable for many years in order to ensure that policyholder obligations are met. Consistent profitability is the engine that serves to maintain, replenish and grow capital.

A.M. Best views business profile as another leading indicator when measuring future balance sheet strength and long-term financial stability—a strong business profile drives favorable and sustainable operating performance. Business profile is partially influenced by the degree of risk inherent in the rating unit’s mix of business, including its geographic concentration, business line concentration and the creditworthiness of the products it writes. In addition, business profile issues often increase in importance at A.M. Best’s highest rating levels, as a strong business profile typically translates into defensible competitive advantages.

For the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=242674.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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Contacts

A.M. Best
Thomas Rosendale, 908-439-2200, ext. 5201
Assistant Vice President
thomas.rosendale@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best
Thomas Rosendale, 908-439-2200, ext. 5201
Assistant Vice President
thomas.rosendale@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com