Fitch: Not All Insurer Financial Strength Ratings Are Created Equal

CHICAGO & NEW YORK--(BUSINESS WIRE)-- Insurer Financial Strength (IFS) ratings are not comparable across credit rating agencies (CRAs), according to a white paper from Fitch Ratings. This lack of comparability, which is most pervasive at the 'A-' level for A.M. Best, is not widely understood and may have negative repercussions for market participants, Fitch says.

Fitch believes ratings users such as insurance brokers or insurance regulators that treat the 'A-' IFS ratings of all CRAs as directly equivalent are misestimating credit risk. The 'A-' IFS rating by A.M. Best is roughly equivalent to 'BBB' rating from Fitch, S&P and Moody's. This is consistent with how capital markets view debt ratings, where debt ratings in the 'BBB' category (and above) are considered investment grade.

In Fitch's view, this lack of comparability could perpetuate less informed (re)insurance selection decisions, higher risk of exposure to unexpected (re)insurer insolvencies and unpaid claims, as well as less information about creditworthiness in the marketplace.

Fitch observed four situations with significant difference in criteria application at the 'A-' IFS rating between A.M. Best and Fitch including: newly formed (re)insurers, insurance companies with high country risks (i.e. low sovereign ratings), captives, and smaller-sized insurance companies. Under A.M. Best's criteria (re)insurance companies in these categories are often rated 'A-' or higher, whereas Fitch's criteria would typically limit ratings to the 'BBB' IFS ratings category.

Fitch attributes the lack of comparability mainly to criteria differences between A.M. Best and the other CRAs, as well as A.M. Best's use of a unique rating scale. A.M. Best uses a 13 category scale to describe its IFS ratings (called "Financial Strength Ratings" by A.M. Best), whereas Fitch uses a 19 category scale that is very similar to the scales used by Moody's and S&P.

Fitch does not suggest that A.M. Best's approach is wrong. Rather, Fitch suggests that A.M. Best's approach is different, and that this difference, in turn, makes A.M. Best's ratings less comparable with those provided by Fitch and the other CRAs.

In addition to an assessment of criteria differences, which are core to Fitch's thesis, Fitch looked at historical statistical ratings performance by comparing default and impairment rates by rating category of the various CRAs. The anecdotal evidence indicates that the historical impairment rate for A.M. Best's 'A-' IFS rating is significantly higher than the estimated historic default rate for Fitch's 'A-' ratings, and falls between Fitch's default rates at 'BBB' and 'BBB-'.

IFS ratings are assigned to insurance and reinsurance companies, and speak to the likelihood that policyholder obligations will be paid in full and on a timely basis. The focus of the IFS rating on policyholder obligations distinguishes it from credit ratings more broadly used by investors across the capital markets that are assigned to debt obligations.

The white paper from Fitch's Business Relationship Management team, "Not All Insurer Financial Strength Ratings Are Created Equal: A Look at the Lack of Comparability of A.M. Best's 'A-' IFS Ratings to Those of Fitch" is available at https://www.fitchratings.com/site/insurance/ifsratings.

Additional information is available on www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160712006601/en/

Fitch Ratings
David Turner
Senior Director
Business Relationship Management
+44 203 530 1442
or
Keith M. Buckley, CFA
(For analytical, criteria inquiries)
Managing Director
Insurance
+1-312-368-3211
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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