Benchmark Study for A.M. Best Ratings – US P&C Mutual...

Prepared by Aon

Benchmark Study for A.M. Best Ratings –US P&C Mutual CompaniesSeptember 2018

AonProprietary & Confidential 1

Overview of Benchmark Study

Aon’s inaugural study to track

how mutual companies are rated under the new A.M. Best

criteria

Source: A.M. Best Credit Reports

Based upon 556 US P&C companies that have been rated by A.M. Best under the new Best's Credit Rating Methodology (BCRM) framework that was released in Oct 2017

Consists of groups and unaffiliated single companies

Stock companies part of mutual group ratings are counted as single mutual company

Based upon ratings as of September 17, 2018

Overview

Mutual, 206, 37%

Stock, 289, 52%

Others, 61,

11%

US P&C CompaniesOrganization Structure Distribution

Total Count - 556


Key Findings

Mutual and stock companies have similar operating performance

with 83% and 84% “Adequate” or better

assessments respectively

50% of mutual companies have

“Neutral” or better business profile vs.

39% for stock companies

97% of mutualshave “Appropriate” or

better ERM assessment compared

to 92% of stock companies

88% of mutualshave “Strongest” or

“Very Strong” balance sheet strength;

compared to 76% of stock companies

84% of mutual companies are rated

‘A-’ or higher and 92% have ‘positive’ or ‘stable’ outlook

Median 5 year combined ratio

volatility shows that stock companies exhibit

32% higher standard deviation than mutual

companies

Median VaR 99.6 BCAR score for mutual

companies is 59%;11 points higher than stock companies at

48%

Only 3% of mutualsreceive a rating lift

from parent affiliation while 21% of stock

companies depend on this lift


US P&C Companies Rating Distribution

4%

88%

8%

6%

85%

9%

2%

93%

5%

Positive

Stable

Negative

Current Rating OutlookMutual Stock Others

10%

40%

34%

11%

5%

11%

32%

34%

10%

13%

7%

41%

41%

8%

3%

A++ /A+

A

A-

B++

B+ &Lower

Current RatingMutual Stock Others

Count: Mutual - 206, Stock - 289, Others (cooperatives, reciprocals, Lloyds) - 61


BCRM Building Block Assessments – US P&C Mutual Distribution

Balance Sheet Strength

(Starting ICR)

Operating Performance

(+2 / -3)

Business Profile(+2 / -2)

Enterprise Risk Management

(+1 / -4)

Comprehensive Adjustment

(+1 / -1)

Rating Enhancement

(+4 / -4)

Strongest - 48%(a+ / a)

Very Strong - 1%(+2)

Very Favorable - 0%(+2) - - -

Very Strong - 40%(a / a-)

Strong - 29%(+1)

Favorable - 9%(+1)

Very Strong - 1%(+1)

Positive – 0%(+1)

Typical Lift – 3%(+1 to +4)

Strong - 10%(a- / bbb+)

Adequate - 53%(0)

Neutral - 41%(0)

Appropriate - 96%(0)

None – 100%(0)

None – 97%(0)

Adequate - 2%(bbb+ / bbb / bbb-)

Marginal - 17%(-1)

Limited - 48%(-1)

Marginal - 3%(-1)

Negative – 0%(-1)

Typical Drag – 0%(-1 to -4)

Weak - 0%(bb+ / bb / bb-)

Weak - 0%(-2)

Very Limited - 2%(-2)

Weak - 0%(-2) - -

Very Weak - 0%(b+ and below)

Very Weak - 0%(-3)

- Very Weak - 0%(-3 to -4) - -

Indicates most common assessment



88% of mutuals have “Strongest” or “Very Strong” balance

sheet strength; compared to 76% of stock companies

– None of the mutual companies are assessed as

“Weak” or “Very Weak”

Median VaR 99.6 BCAR score for mutual companies is

59%; 11 points higher than stock companies at 48%

BCAR at VaR 99.6

Count 25th

Percentile Median 75th

Percentile

Mutual 206 48 59 68

Stock 289 32 48 64

Others 61 46 55 67


48%

40%

10%

2%

29%

47%

13%

7%

3%

33%

61%

5%

2%

Strongest

Very Strong

Strong

Adequate

Weak/Very Weak

Mutual Stock Others


Published VaR 99.6 BCAR Medians

Median BCAR at VaR 99.6


Assessment

Mutual Stock

Count Score Count Score

Strongest 99 64 84 55

Very Strong 83 55 136 51

Strong 20 46 38 38

Adequate 4 32 21 13

Weak -- -- 8 -26

Very Weak -- -- 2 -100

All 206 59 289 48

6455

46

3255 5138

13

-26

-100

StrongestVery

Strong Strong Adequate Weak Very Weak

Mutual Stock

Median BCAR scores for mutual companies is higher than

stock companies at all assessment levels

Count: Mutual - 206, Stock - 289


Operating Performance

Mutual and stock companies have similar operating

performance with 83% and 84% “Adequate” or better

assessments, respectively

Median 5 year combined ratio volatility shows that stock

companies exhibit 32% higher standard deviation than

mutual companies [7.15 for stocks vs. 5.41 for mutuals]

1%

29%

53%

17%

0%

4%

31%

49%

15%

1%

3%

33%

51%

13%

Very Strong(+2)

Strong(+1)

Adequate(0)

Marginal(-1)

Weak(-2)

Mutual Stock Others

Count 25th

Percentile Median 75th

Percentile

5 Year Combined

Ratio

Mutual 206 103 97 92

Stock 289 102 95 84

Others 61 101 97 91

5 Year C.R.

Volatility

Mutual 206 9 5 3

Stock 289 14 7 4

Others 61 9 6 4



Business Profile

‒ Market Position

‒ Pricing Sophistication

‒ Data Quality

‒ Product Risk

‒ Degree of Competition

‒ Management Quality

‒ Regulatory & Market Risk

‒ Distribution Channels

‒ Product/Geographic

Concentration

50% of mutual companies have “Neutral” or better business

profile vs. 39% for stock companies

A.M. Best considers the following characteristics for

business profile assessment:

Innovation will likely become rated sub-component of

business profile assessment


1%

9%

40%

48%

2%

2%

9%

28%

58%

3%

2%

6%

31%

61%

VeryFavorable

(+2)

Favorable(+1)

Neutral(0)

Limited(-1)

Very Limited(-2)

Mutual Stock Others


Enterprise Risk Management

97% of mutual companies have “Appropriate” or better ERM

assessment compared to 92% of stock companies

None of the US P&C companies have received “Weak” or

‘Very Weak” assessment

A.M. Best evaluates ERM on three fronts:

– Risk management framework

– Risk management capabilities in light of risk profile

– Overall ERM


1%

96%

3%

2%

90%

8%

2%

93%

5%

Very Strong(+1)

Appropriate(0)

Marginal(-1)

Weak(-2)

Very Weak(-3/-4)

Mutual Stock Others


Rating Enhancement

Non-lead rating units that are well-integrated within the

organization may receive a lift based on implicit/explicit support

of the broader organization

Conversely, a non-lead rating unit may be penalized for their

association with weaker holding company and receive a drag

Only 3% of mutual companies receive a rating lift from parent

affiliation while 21% of stock companies depend on this lift

No mutual companies received a drag


3%

97%

1%

20%

77%

1%

1%

3%

97%

Lift (+3/+4)

Lift (+1/+2)

Neutral

Drag (-1/-2)

Drag (-3/-4)

Mutual Stock Others


Rating Agency Hot Topics

Tax Reform

Innovation

Cyber

Model performance and risk tolerances Additional emphasis within capital frameworks: RBC catastrophe charge and updated BCAR model

Disruption from the new BEAT Tax Implications of deferred tax asset write downs

A.M. Best released innovation survey to gain insight on how management teams think about innovation in their companies

Innovation will likely become rated sub-component of the Business Profile assessment

Cyber line of business is predicted to be one of the leading growth areas within the P&C space Areas of concern include: using traditional methods of underwriting, risk estimates and

aggregations for cyber exposures, policy language

Consequences of various stress scenarios including catastrophes, terror, casualty events, cyber risk, etc. Response to hurricane and wildfire losses and comparing modeling results

Catastrophe Losses

Enterprise Risk

Management


Contact List

Kathleen Armstrong, CPA+1.513.562.5407 [email protected]

Matthew DiSanto+1.215.255.1721 [email protected]

Jeremy Graczyk, CFA+1.312.381.5561 [email protected]

Junjie Pan, CPA, CPCU, CFE +1.312.381.4989 [email protected]

Derrick Brach+1.312.381.5407 [email protected]

Roopsi Goyal, CFA+1.215.751.1278 [email protected]

Paul Hyer+1.215.751.1283 [email protected]

Patrick Matthews, CFA Global Head of Rating Agency Advisory+1.215.751.1591 [email protected]

mailto:[email protected]









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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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