AM Best Releases Revised Best’s Credit Rating Methodology and Available Capital and Insurance Holding Company Analysis

AM Best has released its revised Best’s Credit Rating Methodology (BCRM) and the criteria procedure, “Available Capital and Insurance Holding Company Analysis” (formerly known as “Available Capital and Holding Company Analysis”). AM Best published its request for comments related to BCRM and the “Available Capital and Insurance Holding Company Analysis” criteria procedure on Feb. 28, 2023, and followed with a comment period that closed on April 28, 2023.

The main revisions to BCRM focus on Part IV: Insurance Holding Company and Issue Credit Ratings. There are no changes to the core components of the analytical process—balance sheet strength, operating performance, business profile and enterprise risk management— which remain the key pillars of the analysis. The changes are primarily related to the notching used to derive the Long-Term Issuer Credit Rating (Long-Term ICR) of an insurance holding company.

The revisions to the updated BCRM include the following:

• Newly developed AM Best classifications of insurance groups, largely determined by their regulatory environment, have been added to the criteria using the terms: Collective Capital Management Groups (CCMG) and Entity Prioritized Structures (EPS), along with an expanded discussion of prudential regulation
• Introduction of a new table (Part IV - Exhibit B.2) to reflect narrower notching between Operating Company Issuer Credit Ratings (ICR) and Insurance Holding Company (IHC) ICRs for those groups classified as CCMGs
• Greater explanation provided on the treatment of groups operating across multiple jurisdictions
• Considerations for intermediate insurance holding companies
• Additional clarification provided for cases where an insurance group does not fit directly into a CCMG or an EPS category; as AM Best will consider the insurance group on a case-by-case basis with a review of its nature, scale and complexity. In the event a group remains not clearly classifiable in either of the two categories, EPS notching will likely be used
• Updated balance sheet assessment factors in Part III - Exhibit B.2: Rating Unit Review to ensure consistency with the example in Part III - Exhibit B.5: Best’s Capital Adequacy Ratio (BCAR) Application

Updates on the criteria procedure, “Available Capital and Insurance Holding Company Analysis,” focus on clarification and increased transparency. Revisions consider the latest capital structures, instruments and features inherent in the insurance market and include the following:

• Elaboration on the importance of issuer regulation for the treatment of debt in credit rating analysis
• Discussion of the treatment of downstreamed debt in BCAR
• Explanation of how service-oriented activities are considered in the analysis of IHCs
• Clarification on the treatment of perpetual preferred shares
• Elaboration on certain instruments’ features
• Expansion of Section C, under the newly titled Hybrid Capital and Senior Debt in the BCAR, to consider issuer factors, including a portfolio view of issued instruments when assessing equity credit for individual debt issues in BCAR

The revisions to the BCRM are expected to result in a recalibration of less than 5% of AM Best’s published credit ratings; rating changes that are made as a result of this recalibration, in and of itself, will not be reflective of a change in credit quality of the organization. A review of the affected ratings will be completed within six months from the effective date of the methodology. AM Best does not expect that the implementation of the revisions to “Available Capital and Insurance Holding Company Analysis” will result in changes to any published ratings.

AM Best received five comments related to BCRM and the criteria procedure, “Available Capital and Insurance Holding Company Analysis,” during the public consultation period through the methodology in-box. AM Best would like to thank all the respondents who participated in the consultation period. A summary of the ‘Response to Comment’ document that address key themes and questions is published here: https://web.ambest.com/ratings-services/rating-methodologies/methodology-comments.

BCRM and this criteria procedure are available at http://www.ambest.com/ratings/methodology.asp.

A video discussion on this subject with Mathilde Jakobsen, senior director, analytics, and Tony Silverman, director, Credit Rating Criteria, Research and Analytics, both of AM Best, is available at http://www.ambest.com/v.asp?v=ambbcrmholdcocriteria124.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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