Transcript Slide 1

A.M. Best Company's
Insurance Market Briefing
Canada
P&C
Joseph Burtone
Assistant Vice
President
September 8, 2010
Agenda
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Rating Components
Canada P/C
A.M. Best Rating Definitions
Operating Insurance Co.
Financial Strength
Rating (FSR)
FSR to Credit Market
Scale / ICR
ICR to Debt Notching
/ Holding Co.
A.M. Best’s Financial Strength Rating
is an independent opinion of an insurers
financial strength and ability to meet its
ongoing policy and contract obligations.
A.M. Best’s Issuer Credit Rating (ICR) is
an opinion of an issuer/ entity’s ability to meet
its ongoing senior financial obligations.
A.M. Best’s Debt Rating is an opinion of an
the issuer/entity’s ability to meet its ongoing
financial obligations to security holders when
due.
Guide To Best's Financial Strength
Ratings
Secure Ratings
A++, A+
A, AB++, B+
Superior
Excellent
Good
Vulnerable Ratings
B, BC++, C+
C, CD
E
F
Fair
Marginal
Weak
Poor
Under Regulatory Supervision
In Liquidation
FSR & ICR EQUIVALENTS
Secure
A+
A
A-
a-
B++
bbb+
bbb
B+
bbb-
ICR
B
bb+
bb
B-
bb-
C++
b+
b
C+
b-
C
ccc+
ccc
ccccc
C-
Non-Investment Grade
A++
aaa
aa+
aa
aaa+
a
FSR
Vulnerable
ICR
Investment Grade
FSR
A.M. Best’s Rating Evaluation
Key Components
Balance Sheet
Strength
Operating
Performance
Best’s Rating
Business
Profile
Balance Sheet Strength
Risk Adjusted Capitalization (BCAR)
 Foundation for financial security
 Leverage
 Quality/Soundness of reinsurance
 Adequacy of loss reserves
 Quality/Diversification of assets
 Liquidity
Best’s Capital Adequacy Model
(BCAR)
 A quantitative tool that indicates whether a company’s
capital is appropriate for a particular rating level. BCAR
by itself never has been the sole basis for determining
any Best’s Credit Rating.
 Important to A.M. Best’s evaluation of both absolute
and relative capital strength
 It is expected that well managed and highly rated
companies maintain excess capital
 Trends are key
Operating Performance
A.M. Best analysis centers on the stability and sustainability of the
company’s earnings
Areas reviewed when analyzing operating performance:
 Underwriting, Investments
 Capital gains/losses
 Pre-tax and total operating earnings
 Underwriting ratio, operating ratio
Volatility is a consideration
 Projections & Trends
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Business Profile
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Business profile is the qualitative component of Best’s rating
evaluation
Key areas of business profile
 spread of risk – geographic, product & distribution
 Revenue composition
 Competitive market position
 Depth and experience of management
Drives current and future operating performance and may
impact long-term financial strength
Risk Management
 Risk management is the common thread that links balance
sheet strength, operating performance and business profile
 Where there is risk, there is uncertainty and where there is
uncertainty there is exposure to volatility
 It’s not risk avoidance, it’s risk management
 Fundamental objective of a sound risk management is to
manage organizations exposure to potential earnings and capital
volatility and maximize value to the organizations various
stakeholders
A.M. Best’s Rating Perspective - Bringing it
all Together
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Capital strength is the foundation of all ratings
Sustained, stable operating profitability ensures future strength
Business profile is the qualitative component that impacts the
quantitative measures
Well-diversified, strong business profile ensures stability and
profitability
Canada Property / Casualty
Overview of Canadian P&C Industry
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Market is stable
Capitalization remains strong – enhanced by net
income and unrealized investment gains
Profitable, but declining earnings
Challenges in underwriting offset by gains in
financial markets
Overall, companies acting prudently
Canadian P&C
Risk Adjusted Capitalization
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Weighted average BCAR score is strong up 12% at year end ’09
Adversely impacted by investment markets in 2008
Best Capital Adequacy Ratio (BCAR)
Weighted Averages
230.0
224.0
221.8
220.0
216.5
210.0
200.0
200.0
190.0
2006
2007
2008
Year
2009
Canadian P&C
Regulatory Capital
2009 weighted average MCT score virtually unchanged from 2008.
BAAT score down 5.3%.
Weighted Average BAAT & MCT
(excluding ICBC and Lloyds CAB)
Weighted Average
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700.0
600.0
588.3
605.1
585.2
572.9
500.0
400.0
309.0
283.3
268.2
300.0
268.3
200.0
2006
2007
2008
2009
Year
Baat
MCT
Canadian P&C
A.M. Best Financial Strength Rating
Ratings Distribution
(Interactive Ratings Only)
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Ratings have remained relatively consistent with little movement between
rating categories.
97% of rating units have secure ratings of which 79% were rated Excellent or
Superior at YE 2009.
29%
34%
31%
29%
31%
49%
51%
53%
48%
13%
15%
14%
14%
17%
5%
6%
3%
4%
4%
3%
YE 2005
YE 2006
YE 2007
YE 2008
YE 2009
47%
19%
29%
52%
Vulnerable
Good
Excellent
Superior
June 30 2010
Canadian P&C
Net Income
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2009 Net Income driven by investment gains and lower underwriting losses
June 2010 Net Income approx. C$1.7 billion
(excluding ICBC and Lloyds CAB)
6.0
5.1
C$ Billions
5.0
4.6
4.9
4.0
3.0
2.1
2.4
2.0
1.7
1.0
0.0
2005
2006
2007
2008
Year
2009
2010_06
Canadian P&C
Pre-tax Returns
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Positive but declining returns through 2009
Driven by underwriting losses and lower investment returns
Pre-Tax Return on Equity and Revenue
(excluding ICBC and Lloyds CAB)
30.0
Percent
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20.0
20.4
16.3
20.9
18.1
18.5 17.2
10.0
10.1 9.7
9.0 8.5
6.1 5.9
2008
2009
2010_06
0.0
2005
2006
2007
Year
ROE
ROR
Canadian P&C
Operating Ratios
Ratio below 100 reflective of profitability from combined underwriting and
investment income without capital gains/losses
(excluding ICBC and Lloyds CAB)
95.0
90.7
Operating Ratio
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91.8
90.0
88.3
84.0
85.0
82.3
83.1
80.0
75.0
2005
2006
2007
2008
Year
2009
2010_06
Canadian P&C
Underwriting Ratios
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Ratio below 100 indicative of profitable underwriting
Underwriting expenses consistent over last five years ranging between
28.9 and 30.5 points to the underwriting ratio
2008 and subsequent due to higher Net Loss and LAE ratios
(excluding ICBC and Lloyds CAB)
105.0
Underwriting Ratio
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101.2
100.9
100.0
95.0
97.8
92.4
93.2
91.5
90.0
85.0
2005
2006
2007
2008
Year
2009
2010_06
Canadian P&C
Net Loss and LAE Ratios
Increase in 2008 and subsequent years due to;
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More frequent and severe weather and fire losses
Auto personal accident claims cost inflation
Less favorable reserve development on prior accident years
(excluding ICBC and Lloyds CAB)
75.0
70.7
70.7
70.0
65.0
67.7
63.5
63.4
62.0
60.0
Year
20
10
_0
6
20
09
20
08
20
07
20
06
55.0
20
05
Net Loss & LAE Ratio
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Canadian P&C
Automobile
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Personal accident net loss ratio up to 137.6 @ YE 09 and rising
Ontario auto reform – implementation 9/1/10
Creates concerns regarding pricing, reserving, profitability, consumer
confidence.
Net Loss and LAE Ratio Trend
(private insurers only)
160.0
Net Loss and LAE Ratio
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140.0
137.6
141.3
2009
2010_06
116.6
120.0
94.6
100.0
80.4
80.0
68.6
60.0
40.0
20.0
0.0
2005
2006
2007
2008
Year
Auto - Liability
Auto - Personal Accident
Auto - Other
Canadian P&C
Personal Property
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Frequency and severity up
Intense wind, hail, rain, water damage claims
Industry recognizing insurance to value (ITV), aging infrastructure, competitive
pricing are concerns
Net Loss and LAE Ratio Trend
(excluding ICBC and Lloyds CAB)
80.0
Net Loss and LAE Ratio
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75.8
75.9
75.0
70.0
69.5
66.4
66.7
65.0
59.2
60.0
55.0
50.0
2005
2006
2007
2008
Year
2009
06_2010
Canadian P&C
Commercial Property
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Competitive pricing persists
No signs of significant rate hardening
Retentions up slightly
Net Loss and LAE Ratio Trend
(excluding ICBC and Lloyds CAB)
70.0
68.2
66.2
Net Loss & LAE Ratio
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65.0
64.3
64.2
60.0
56.2
55.0
52.1
50.0
2005
2006
2007
2008
Year
2009
06_2010
Canadian P&C
Investment Income
Investment Income Trend
(excluding ICBC and Lloyds CAB)
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
4.3
4.1
3.7
3.3
3.3
2.9
2.6
3.3
3.1
2.8
1.2
1.1
2.1
1.9
1.0
0.2
0.2
10
09
06
_2
0
20
08
20
07
20
20
06
-0.5
05
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20
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Realized capital gains pulled up total investment income
Continued low interest rates, potentially lower dividend and interest income in 2010
Sell off of equities in 2008 reversing for potentially higher returns
C$ Billion
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Year
NII
R G/(L)
Total Inv Income
Canadian P&C
Composition of Invested Assets
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C$86.9 billion invested at YE 2009
C$74.4 billion (85.6%) in conservative, highly rated fixed income securities and cash
C$9.8 billion (11.3%) in common and preferred shares
Slight movement back to equities
Non A f f iliated Invested A ssets
Canadian P&C
A s of Dec. 31, 2009
(excludes ICBC & Lloyds CA B)
Other
2.4%
RE / Mort
0.7%
Trm Dep, Bnds
& Debents.
80.8%
Cash
4.8%
Comm. Shrs.
7.3%
Pref . Shrs.
4.0%
Canadian P&C
Market Review
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Capitalization strengthened and continues to support a stable
rating environment
Earnings up slightly and expected to remain positive
Underwriting challenges
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Uncertainty of benefits to be derived from auto reforms in Ontario
Competitive commercial lines pricing
Rising property damage losses from storms and fire
Aging infrastructure
Regulatory intervention
Below average investment returns anticipated in the near term
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Putting additional pressure on underwriting discipline
Canadian P&C
Market Outlook 2010
Industry is stable
 Capitalization expected to remain strong
 Not anticipating significant number of
rating actions
 Earnings expected to remain positive but
not robust due to underwriting and
investment challenges
 A.M. Best remaining cautious on benefits
of auto reforms.
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