{"id":31641,"date":"2015-12-18T00:29:06","date_gmt":"2015-12-18T05:29:06","guid":{"rendered":"http:\/\/prefblog.com\/?p=31641"},"modified":"2015-12-18T00:29:06","modified_gmt":"2015-12-18T05:29:06","slug":"dbrs-releases-and-applies-new-insurance-company-methodology","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=31641","title":{"rendered":"DBRS Releases and Applies New Insurance Company Methodology"},"content":{"rendered":"

DBRS has touted their new insurance company rating methodology<\/a>:<\/p>\n

DBRS Limited (DBRS) has today released its \u201cGlobal Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015)\u201d after a public request for comment period. The new methodology considers several factors, including the increased complexity of insurance risks and regulation; major shifts and dynamics in competition across the diverse financial services space; regulatory environment evolution, particularly in respect of evolving views on the definitions of capital; and the growing global reach of internationally active insurance companies.<\/p>\n

The methodology, which places a high emphasis on the prevailing regulatory and operating environments, is underpinned by the DBRS core rating philosophy of \u201crating through the cycle.\u201d The unique approach outlined in the new methodology incorporates a transparent approach to the notching between the holding company and operating company ratings, as well as a clear qualitative and quantitative approach to assessing franchise strength, while incorporating other key analytical considerations, including earnings ability, liquidity, risk profile, capitalization and asset quality.
…<\/b>
The methodology specifically addresses the rating of insurance holding companies by taking into consideration the unique aspects of these parent companies and the operating groups that they control, considering various characteristics, including their diversified holdings, capital structure and cash flows.<\/p>\n

Given an existing FSR at the operating company, the parent holding company would typically be notched down two notches from this FSR to reflect structural subordination under this new methodology. Ratings of a holding company\u2019s debt and preferred shares depend on the FSR at its operating company, which then serves as the anchor point for the rating of the various capital instruments at the operating company and the holding company. Existing insurance company ratings and related ratings of insurance holding companies were revised.<\/p><\/blockquote>\n

The methodology itself is titled Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations<\/a>:<\/p>\n

Impact of Related Methodologies and Criteria \u2013 Final Rating and Ratings for Specific Securities<\/b><\/p>\n

Once DBRS has determined the initial FSR of the insurer, several other methodologies and criteria are employed to determine the final FSR and ratings for specific classes of securities from senior debt to preferred shares. As discussed in these methodologies, the final rating will consider aspects such as the support assessment (or pressure) of applicable sovereign governments and appropriate notching for the holding company, ranking and contingent risk considerations.
…<\/b>
Operating Company Ranking of Creditors<\/b><\/p>\n

This global insurance methodology generates an FSR for the main operating insurance company based on information applicable
\nto the consolidated group. In jurisdictions where policyholder claims rank above senior and subordinated debt, this claim superiority will be recognized in the notching with reference to the ranking of the various classes of creditors noted below.<\/p>\n

General method of ranking (for a standard operating insurance company):
\n1a. FSR: Credit risk evaluation of the policyholders\u2019 risk of the company\u2019s expected future probability of failing to honour undisputed claims or benefit payments as per the policy contract.
\n1b. Issuer Rating: The FSR rating will also be the Issuer Rating for the operating insurance company.
\n2. Senior Debt Rating: FSR minus one notch (if no senior debt will be issued because of regulatory disadvantage and management practice, this placeholder notching for senior debt could be ignored, uplifting the subordinated debt rating, etc.).
\n3. Sub-Debt Rating: FSR minus two notches.
\n4. Preferred Shares Rating: FSR minus three notches.<\/p>\n

Holding Company Notching<\/b><\/p>\n

In determining the appropriate rating of holding company debt, DBRS will notch from the FSR of the operating insurance company in accordance with the following general guidelines. While a rating differential between the FSR of the operating insurance company and the rating of the holding company\u2019s senior debt is typically two notches, it can range from zero to four notches or more depending on a number of factors. Such factors include:
\n\u2022 Legal structure and management of the insurance group,
\n\u2022 Diversity of subsidiary operating businesses and their contributions to the strength of the holding company,
\n\u2022 Consistency of dividends from operating businesses as well as the assessment of regulatory upstream dividend constraints and the liquidity of operating companies,
\n\u2022 Stand-alone liquidity of the holding company to meet capital servicing charges,
\n\u2022 Holding company access to funds to pay fixed holding company charges and rollover funding,
\n\u2022 Consolidated financial leverage measures,
\n\u2022 Double leverage ratio (please refer to definitions in the Appendix 2),
\n\u2022 Consolidated fixed-charge coverage ratio,
\n\u2022 Presence of a common regulator for the holding company and operating company, resulting in coordination of regulation and
\nregulatory action,
\n\u2022 Low solvency ratios in operating subsidiaries, limiting the ability to pay dividends regardless of the regulatory approval process and
\n\u2022 If the operating company\u2019s FSR is rated BBB high or lower, an assessment will be made that may determine a greater than two notch differential for the holding company.<\/p>\n

The holding company\u2019s investment in subsidiaries is primarily equity based, which creates a structural subordination for holding company debtholders. DBRS recognizes that this structural subordination will only be realized in the event of the operating company being declared insolvent and, following the creditor adjudication process, the holding company debt investors may find that their claim is treated with the ranking of an equity holder of the operating subsidiary.<\/p>\n

By rating the holding company\u2019s senior debt at least two or more notches below the FSR of the main operating company, the senior and subordinated debt of the holding company is always at least one notch lower than the operating company\u2019s senior and subordinated debt. In jurisdictions where operating companies do not typically issue senior debt, the operating company\u2019s subordinated debt may be rated one notch below the FSR. In this case, the holding company\u2019s senior debt will likely be rated one notch below the operating company\u2019s subordinated debt. Maintaining a notching difference between the operating company\u2019s debts and holding company\u2019s debts will communicate to the investor that there is a ranking and recovery difference between similar debt tranches of the holding company and operating company.<\/p>\n

This pass-through of debt capital in the form of equity capital can be reflected in the double leverage ratio (for a definition of this ratio, please refer to Appendix 2). Regulatory environments can place limits when and if dividends can be paid to the holding company by the operating company. A restrictive regulatory environment with respect to dividends creates risk that the holding company may have difficulty meeting its capital servicing obligations. This and other factors that assist or hinder the holding company will be evaluated. Generally, the notching of the capital instruments for a holding company with a two-notch differential would have this pattern of notching for the various rankings of security instruments:<\/p>\n

1. Parent Holding Company Issuer Rating \u2013 FSR minus two notches.
\n2. Holding Company Senior Debt \u2013 FSR minus two notches.
\n3. Holding Company Sub-Debt \u2013 FSR minus three notches.
\n4. Holding Company Preferred shares \u2013 FSR minus four notches.<\/p>\n

The extent of the notching can vary with the restrictiveness of the regulatory and supervisory environment in terms of dividends and other payments. For example, as a result of U.S. regulatory dividend restrictions for insurance companies, the issuer rating for U.S. holding companies would typically be rated three notches below the FSR. For non-U.S. insurance holding companies that have significant U.S. insurance operations, the analysis would consider the parent holding company\u2019s ability to access sufficient dividend income from other operations as well as the U.S. insurance subsidiaries.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

DBRS has touted their new insurance company rating methodology: DBRS Limited (DBRS) has today released its \u201cGlobal Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015)\u201d after a public request for …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-31641","post","type-post","status-publish","format-standard","hentry","category-miscellaneous-news"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/31641","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=31641"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/31641\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=31641"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=31641"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=31641"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}