observations on a.m. best rating activity for “a-” p&c...

Prepared by Aon Benfield Analytics Rating Agency Advisory

Observations on A.M. Best Rating Activity For “A-” P&C Companies July 2017

Aon Benfield Analytics | Rating Agency Advisory 1

Table of Contents

Section 1 Five-Year Upgrade Activity (2012 – 2017) 2

Section 2 Five-Year Downgrade Activity (2012 – 2017) 7

Section 3 Ten-Year History Post Downgrade From “A-” 10

Section 4 Key Metrics – Upgrades & Downgrades (2012 – 2017) 11

Section 5 Keys For An “A-” or Better Rating 14


Five-Year Upgrade Activity (2012 – 2017)

67 upgrades from “A-” to “A”, 41 on “own merit”* – Median BCAR of own merit companies in their upgrade year was 328% – Median 5 year combined ratio and ROR during their upgrade year were 93% and 19%, respectively

37 upgrades from “B++” to “A-”, 29 on own merit – Median BCAR of own merit companies in their upgrade year was 290% – Median 5 year combined ratio and ROR during their upgrade year were 91% and 15%, respectively

* Own Merit: based on improvement in operating performance, capitalization, and/or underwriting leverage without any parental support

Upgrades from A- to A (Own Merit)

(Median) 2012 2013 2014 2015 2016 2017 Total

Count 7 11 8 3 8 4 41

5 year C.R. 85% 99% 95% 86% 96% 91% 93%

5 year ROR 31% 8% 23% 27% 14% 16% 19%

BCAR 270 332 312 515 297 381 328

Upgrades from B++ to A- (Own Merit)

(Median) 2012 2013 2014 2015 2016 2017 Total

Count 5 4 4 4 7 5 29

5 year C.R. 90% 93% 87% 92% 83% 94% 91%

5 year ROR 19% 14% 6% 11% 21% 10% 15%

BCAR 395 269 252 220 278 293 290


Acquisition / Group

Affiliation 39% Own Merit

61%

Upgrades from “A-” to “A” (2012 – 2017)

* All U.S.-based P&C rating units excluding Non-Rated Co.’s in BestLink – 14 July 2017

221 of 667* or 33% of rating units were rated “A”

67 companies upgraded to “A” since 2012 – 41 traditional, own merit

– 3 subsequently lost “A” rating – 26 via acquisition / group affiliation

– 3 subsequently lost “A” rating

Out of 41 own merit upgrades: – 37 (or 90%) had positive outlook – 4 (or 10%) had stable outlook

Own merit companies reported key profitability ratios in the year of their upgrade as follows:

(Median) 1 Year 3 Year 5 Year Std. Dev.

C.R. 93% 96% 93% 7.6

ROR 18% 18% 19% 6.5

BCAR 328

Rating Trigger for Upgrade to “A” (As of June 2017)

Total Companies: 67


A.M. Best Rating Changes Trigger (“A-” to “A”): 2012 - 2017

7

11

8

3

8

4

11

6

1

2

3 3

2012 2013 2014 2015 2016 2017*

Merit Acquisition / Group Affiliation

* Note: YTD 2017 as of July 14, 2017 Source: A.M. Best


Acquisition / Group

Affiliation, 22%

Own Merit, 78%

Total Companies: 37

Upgrades from “B++” to “A-” (2012 – 2017)

Rating Trigger for Upgrade to “A-” (As of June 2017)

* All U.S.-based P&C rating units excluding Non-Rated Co.’s in BestLink - 14 July 2017

229 of 667* or 34% of rating units were rated “A-”

37 companies upgraded to “A-” since 2012 – 29 traditional, own merit

– 2 subsequently upgraded to “A” – 8 via acquisition / group affiliation

Out of 29 own merit upgrades: – 27 (or 93%) had positive outlook – 2 (or 7%) had stable outlook

Own merit companies reported key profitability ratios in the year of their upgrade as follows:

(Median) 1 Year 3 Year 5 Year Std. Dev.

C.R. 91% 91% 91% 6.1

ROR 14% 16% 15% 6.2

BCAR 290


A.M. Best Rating Changes Trigger (“B++” to “A-”): 2012 - 2017

5

4 4 4

7

5

2 2 2

1

0

1

2012 2013 2014 2015 2016 2017*

Merit Acquisition / Group Affiliation

* Note: YTD 2017 as of July 14, 2017 Source: A.M. Best


Five-Year Downgrade Activity (2012 – 2017)

Poor operating results and cat losses were the leading triggers, comprising 69% of all downgrades

41 companies were downgraded from “A-” – 37 (or 90%) downgraded to “B++” – 4 (or 10%) downgraded to “B+” or lower rating

Out of 41 downgrades: – 73% had negative outlook, 25% had stable outlook and 2% had positive outlook

Post downgrade picture: – 7 (or 17%) subsequently upgraded to “A-” or higher – 19 (or 46%) remain unchanged – 2 (or 5%) further downgraded – 13 (32%) not-rated

Property, Commercial Casualty and Workers’ Compensation composites were the most impacted, comprising 61% of downgrades

Company profile for downgrades: – 49% stock companies; 37% mutual companies; 14% other


Main Triggers For Downgrade (2012 – 2017)

23

8

5

2

1

1

1

Poor operating results

CAT Losses

Reserve Development

Miscellaneous

M&A

Parental concerns

Elevated UnderwritingLeverage

Total Companies: 41

Poor operating results was the leading trigger for the 41 downgrades from “A-”, but reasons varied

Many of the triggers resulting in downgrades are interrelated to some degree, such as deficient reserves, cat losses and poor operating results

Miscellaneous reasons include discontinuation of a line of business and management’s request to withdraw rating

Rating Trigger for Downgrade From “A-” (Through June 2017)


Composite Count % of Downgrades

% of All Rating Units *

Property 11 27% 25%

Commercial Casualty 8 20% 18%

Workers' Compensation 6 15% 9%

PPA & Homeowners 5 12% 17%

Other (PPA, Surety, etc.) 4 10% 12%

Prof. Non-Std Auto Writers 3 7% 4%

Commercial Automobile 2 5% 4%

Medical Prof. Liability 1 2% 7%

Surplus 1 2% 3%

Credit --- --- 1%

Total 41 100% 100%

“A-” Downgrades By Composites (2012 – 2017)

27% of all downgrades belonged to the Property composite followed by Commercial Casualty and Workers’ Compensation

Composites with a higher percentage of downgrades relative to all rating units include Workers’ Compensation, Prof. Non-Std Auto, Property and Commercial Casualty

* Total Rating Units: 667 Source: BestLink - 14 July 2017


Ten-Year History Post Downgrade from “A-” (2007 - 2017)

Same Rating, 24, 29%

Lower Rating, 11, 13%

Non Rated, 34, 42%

Own Merit, 5

M & A, 1

Parental Support/

Affiliation, 7

Upgraded to A- or Higher, 13, 16%

Post Downgrade Rating Distribution Rating Triggers for Subsequent Upgrades to “A-” or Higher

Total Companies: 82 Total Companies: 13

42% of companies downgraded in the last 10 years are now non rated Only 5 (or 6.1%) were upgraded to “A-” or higher based primarily upon their own merit It took an average of 6.6 years for these 5 companies to regain “A-” on own merit


Key Metrics – Median “A-” to “B++” Downgrades

(Year of Downgrade)

All “A-” Rating Units Through July 14, 2017

“B++” to “A-” Own Merit Upgrades

(Year of Upgrade)

Total Companies 37 229 29

Combined Ratio (%) 116 96 91

5yr Combined Ratio (%) 114 97 91

Pretax ROR (%) -14 11 14

5yr Pretax ROR (%) -6 9 15

NPW / PHS (x) 1.2 0.7 0.8

BCAR (%) 196 298 290

Key Metrics – Upgrades and Downgrades (2012 – 2017)

Source: BestLink – 14 July 2017


Key Metrics – Median “A” to “A-”

Downgrades (Year of Downgrade)

All “A” Rating Units Through July 14, 2017

“A-” to “A” Own Merit Upgrades

(Year of Upgrade)

Total Companies 28 221 41

Combined Ratio (%) 114 96 93

5yr Combined Ratio (%) 106 95 93

Pretax ROR (%) -9 11 18

5yr Pretax ROR (%) 1 12 19

NPW / PHS (x) 0.8 0.7 1.0

BCAR (%) 246 323 328

Key Metrics – Upgrades and Downgrades (2012 – 2017)

Source: BestLink – 14 July 2017


5 Year Minimum & Median BCAR Scores by Rating

Rating/Years Min. 2012 2013 2014 2015 2016

A++ 175 298 295 293 283 289

A+ 160 326 323 312 308 294

A 145 292 303 315 320 323

A- 130 272 278 296 303 298

B++ 115 219 216 222 234 233

B+ 100 175 198 200 214 230

2016 A++ A+ A A- B++ B+

Min 175 160 145 130 115 100

25th % 268 214 250 226 183 167

Med 289 294 323 298 233 230

75th % 412 399 445 468 314 283

Source: BestLink - 14 July 2017 and Aon Benfield Analytics


Keys For An “A-” or Better Rating

More than just BCAR – Profitability trends and sustainability of results – Parental support / holding company financials, e.g., financial flexibility – Competitive advantages that differentiate the company

Risk Management – Use in operations and management decisions – Evidence of advancing practice – Need for formal ERM framework varies by company

Management Track Record – Ability to meet expectations / plans – Market expertise and stability

Effective Communication – No surprises! – Present tangible evidence that addresses key rating issues – Understand all rating variables and impact of evolving criteria


Rating Agency Advisory

– Catastrophe Risk Tolerance Study

– Observations A-, A and A+ rating trends—key drivers for upgrades and downgrades

– Evolving Criteria (publication on rating agency and regulatory developments)

– Bulletins on Stochastic BCAR Model Updates and Best’s Credit Rating Methodology (BCRM)

– Annual Updates from A.M. Best’s Review & Preview Conference

Aon Benfield has the best access available to key decisions makers at rating agencies

Aon Benfield’s track record demonstrates consistent, accurate advice to clients

Our team provides value-add research such as:

http://thoughtleadership.aonbenfield.com/sitepages/display.aspx?tl=663



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Contact List

Patrick Matthews, CFA

Aon Benfield Analytics

+1.215.751.1591

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Roopsi Goyal, CFA


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Kathleen Armstrong, CPA


+1.513.562.4508

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Kanika Dhawan


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© Aon Benfield 2017. All rights reserved. The rating process is constantly changing, and while Aon Benfield, its parent, affiliate, and subsidiaries makes every reasonable attempt to stay abreast of the latest rating trends, it does not warrant the accuracy of the calculations herein. The content of this document is made available on an “as is” basis without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on the content herein. Actual future results may differ materially from this report. Aon Benfield stresses that anyone considering the courses of action contained within should review the intended actions and related agreements thoroughly with their accounting staff and/or auditors.

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