A.M. Best – Common Rating

Committee Issues

John Andre, Group Vice President

Steve Chirico, Assistant Vice President

September 18, 2012

What is a Rating Committee

• Composed of 6 - 11 voting members, including the team

leader, analyst and committee chairperson. The committee

chair is normally the GVP associated with the team.

• Held every Monday and Thursday or on an ad-hoc basis in

order to react to significant rating events

• A higher level rating committee - Corporate Rating Committee

- acts as an “appeals court” in the event the chairperson or

analytical team feels the rating outcome was derived against

policy or methodology. The chair of the RC has the prerogative

to bring a rating to CRC.

What is the Purpose of a Rating

Committee

• Acts as a leveling device by incorporating different opinions to

arrive at the final outcome. The RC brings in analysts with

varying backgrounds and levels of expertise. Results in a

balanced, well rounded and consistent approach.

• Ensures that an analytical voting team has followed procedure

correctly.

Ratings Division Process - Internal

• Initial analytical discussion takes place

• Data submission

• Analytical team meets with management and prepares the

recommendation

• Analytical team presents to a Review Committee (RC)

• RC votes to determine rating assignment

• Depending on circumstances, additional rating committees may be

utilized

Ratings Division Process – External

• Final rating determination is communicated to company

• If management disagrees, company has three days to appeal

• President’s Letter, rating report, and press release draft sent to

company for approval

• Rating is published in A.M. Best products and in the public domain

(Business Wire)

Key ComponentsManagement

Business Profile

Enterprise RiskManagement

Operating Performance

Parent Company / Sponsor Financial Analysis

Balance Sheet Strength

Issue

• Poor corporate earnings and product issues has resulted in

one of the corporate credit ratings agencies downgrading the

owner of a singer parent captive.

– How does the analyst react?

– Does it automatically go in front of a rating committee?

– What is the impact on the captive rating?

Issue

• An RRG is considering increasing it’s retention on professional

liability from $300k to $500k; capital and surplus is just north

of $5 million. Earnings have been consistently profitable over

the last five years. Leverage is somewhat above average. The

current rating is B++ with a stable rating outlook

– What is the impact on the rating?

Issue

• Founder of a commercial trucking RRG is planning on

retirement at year end

• Her former second in command resigned for a new

opportunity with a competitor 2 years ago

• There are internal candidates and an external search is

ongoing

• Operating results have been volatile in recent quarters

– What answers should the analyst bring to the Rating Committee?

– What might the rating impact be?

Issue

• U.S. based single parent captive is considering a significant

“loan back” to its parent

• Underwriting results in recent years have been mixed

• There has been a negative outlook on the captive rating since

2011

– What issues does the Rating Committee consider in evaluating a loan

back?

– What is the impact on the rating?

Issue

• Story in the trade press has a rated captive in a coverage

dispute

– How did the analyst react to the story?

– What does rating committee need to hear and how might this impact

the rating?

Issue

• As association captive has had a negative rating outlook

assigned since September 2009.

• Through June 30, 2012, results have improved but not as

materially as management projected at the last management

meeting in the fall of 2011

• The rating is due on September 30, 2012

– What would the rating analyst present at committee?

– How long can an outlook be sustained?

– What may be a likely rating outcome?

– If the outcome is unfavorable, how can a management team appeal a

decision?

Issue

• A highly rated and sufficiently capitalized RRG has a business

opportunity that may significantly increase its underwriting

leverage. Management calls to find out what the rating

implications would be.

– What type of detail would the analyst need from the rating contact to

tell the rating committee?