Best’s Credit Rating Methodology : Global Life and Non-Life Insurance Edition potx

Best’s Credit Rating
Methodology

Global Life and Non-Life Insurance Edition






Global Life and Non-Life Insurance Edition
Important Notice: Best's Credit Ratings
A Best’s Financial Strength Rating is an independent opinion of an insurer’s financial strength and ability to meet
its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative
evaluation of a company's balance sheet strength, operating performance and business profile. The Financial
Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and
contract obligations. The rating is not assigned to specific insurance policies or contracts and does not address any
other risk, including, but not limited to, an insurer’s claims-payment policies or procedures; the ability of the
insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability
contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to
purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer,
nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser.

A Best's Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of an entity, a credit
commitment or a debt or debt-like security. It is based on a comprehensive quantitative and qualitative evaluation
of a company's balance sheet strength, operating performance and business profile and, where appropriate, the
specific nature and details of a rated debt security. Credit risk is the risk that an entity may not meet its contractual,
financial obligations as they come due. These credit ratings do not address any other risk, including but not limited
to liquidity risk, market value risk or price volatility of rated securities. The rating is not a recommendation to buy,
sell or hold any securities, insurance policies, contracts or any other financial obligations, nor do they address the
suitability of any particular financial obligation for a specific purpose or purchaser.
In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information
provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the
accuracy or reliability of the information.
One of the primary sources for this information are a company’s annual and quarterly (if available) financial
statements presented in accordance with statutory accounting requirements (U.S.) or in accordance with customs
or regulatory requirements of the country of domicile (non-U.S.). Meetings between A.M. Best senior personnel
and company management also provide additional and valuable in-depth information on the company's current
performance and future objectives. For more information regarding specific data used in a typical rating evaluation,
read Overview: Best’s Interactive Credit Rating Process, in this document.
Any and all ratings, opinions and information contained herein are provided "as is," without any express or implied
warranty. A rating may be changed, suspended or withdrawn at any time for any reason at the sole discretion of
A.M. Best.
A.M. Best does not offer consulting or advisory services. A.M. Best is not an Investment Adviser and does not offer
investment advice of any kind, nor does the company or its Rating Analysts offer any form of structuring or
financial advice. A.M. Best does not sell securities. A.M. Best is compensated for its interactive rating services.
These rating fees can vary from US$ 5,000 to US$ 500,000. In addition, A.M. Best may receive compensation from
rated entities for non-rating related services or products offered. For additional information on A.M. Best’s fee
policy, read
Compensation Disclosure
(www.ambest.com/nrsro/CompensationDisclosure.pdf).
Best’s Credit Reports
Best’s Credit Reports

(www.ambest.com/sales/ambcreditreportsip/default.asp) are prepared solely for the
confidential use of our subscribers.
Insurance Companies. For most insurers domiciled in the United States, the data contained within these
reports are based on each insurance company's sworn annual and quarterly (if available) financial statement as
prescribed by the National Association of Insurance Commissioners (NAIC) and as filed with the Insurance
Commissioners of the states in which the companies are licensed to do business. These official financial statements
are presented in accordance with statutory accounting requirements.
Insurance-Linked Securities. For these transactions, data and information is gathered from all structural,
regulatory, legal and third-party related documentations. Depending on the nature of the transaction, other types
of information also are considered, including perils and geographic regions covered, peril modeling firm output,
the output of scenarios run by actuarial organizations and related stress tests.
Non-U.S. Data related to companies operating outside the United States are presented in accordance with
customs or regulatory requirements of the country of domicile, and there may be significant variations in
accounting standards or methods of reporting from one country to another. These differences are imbedded in the
accounting principles used, the valuation of assets and liabilities and the treatment of taxes. Financial data usually
are received in the currency of the country where the company is domiciled, and A.M. Best’s reports generally are
Best’s Credit Rating Methodology _____________________________________________ 2

Global Life and Non-Life Insurance Edition
presented in that currency and may be presented in U.S. dollars as well. A.M. Best’s non-U.S. reports represent a
variety of reporting dates, as the fiscal years utilized by companies vary according to traditional reporting periods
or regulatory requirements.
Within some of the Canadian insurance company presentations, portions of the data are provided by Beyond 20/20
Inc., Ottawa, Canada.
Supplemental Data. In addition, our reports may include supplemental information obtained by us, such as:
o Data supplied in response to our questionnaires.
o Data contained in state examination reports.
o Audit reports prepared by certified public accountants.
o Loss-reserve reports prepared by loss-reserve specialists.
o Annual reports to stockholders and policyholders.

o Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS)
financial statements.
o Reports filed with the Securities and Exchange Commission (SEC) in the United States.
While the information obtained from these sources is believed to be reliable, its accuracy is not guaranteed. A.M.
Best does not audit the company's financial records or statements and therefore cannot attest as to the accuracy of
the information provided to us. Consequently, no representations or warranties are made or given as to the
accuracy or completeness of the information and no responsibility can be accepted for any error, omission or
inaccuracy in our reports.
For additional details, see A.M. Best’s Terms of Use (www.ambest.com/terms.html). For more information
regarding A.M. Best's rating process, including handling of confidential (non-public) information, independence,
and avoidance of conflicts of interest, please read the A.M. Best Code of Conduct

(www.ambest.com/nrsro/code.pdf).
Best's is a registered trademark of the A.M. Best Company, Inc. The rating symbols "A++,'' "A+," "A,'' "A-," "B++"
and "B+'' are registered certification marks of the A.M. Best Company, Inc. View our Legal and Licensing
(www.ambest.com/about/legal.html) information for details on the use of A.M. Best trademarks, logos and service
marks.


For a complete list of Best’s Credit Rating Methodologies, including methodologies released
subsequent to the publication of this document, visit A.M. Best’s methodology
Web page
(www.ambest.com/ratings/methodology.asp).

Best’s Credit Rating Methodology _____________________________________________ 3

Global Life and Non-Life Insurance Edition
Table of Contents
Introduction 6
Purpose of Document 6

Usage of Best's Ratings 6
Overview: Best’s Credit Ratings 8
About A.M. Best 8
Best’s Credit Ratings Within the Insurance Segment 9
Best’s Financial Strength Ratings 9
Best’s Issuer Credit and Debt Ratings 9
Ratings Initiation 10
Best’s Outlooks, Modifiers and Financial Size Categories 11
Overview: Best’s Interactive Credit Rating Process 12
Conducting a Rating Meeting 14
Property/Casualty Sample Meeting Agenda 15
Information Requirements 17
Requested Data Items – Property/Casualty & Life/Health Insurance Companies 17
Best’s Interactive Credit Rating Methodology 19
Overview of Best’s Credit Rating Evaluation 19
Best’s Credit Rating Approach: Top-Down and Bottom-Up 20
Key Components of Best’s Credit Rating Evaluation – Operating Company Analysis 22
Balance Sheet Strength 22
Operating Performance 33
Business Profile 36
Key Components of Best’s Credit Rating Evaluation – Holding Company Analysis 38
Corporate Capital Structure 38
Holding Company Methodology 39
Key Components of Best’s Credit Rating Evaluation – Assessing Non-Rated Affiliates 45
Enterprise Risk Management 45
Risk Management and the Rating Process 46
Enterprise Risk Management – Key Topics and Rating Meeting Agenda Items 47
Risk Management and Best’s Capital Adequacy Ratio (BCAR) 48
Group Rating Methodology 49
Country Risk Analysis 50

Application of Credit Rating Methodologies to Specific Types of Insurers
52
Rating Start-Ups and New Company Formations 52
Balance Sheet Strength 52
Sponsorship and Investors 53
Business Profile 53
Rating Captives 54
Balance Sheet Strength 55
Operating Performance 56
Best’s Credit Rating Methodology _____________________________________________ 4

Global Life and Non-Life Insurance Edition
Business Profile 56
Rating Title Insurance Companies 57
Key Differences of Title Insurance From Property/Casualty Insurance 57
Rating Methodology for Title Insurance Companies 59
Rating Health Insurance Companies 61
Balance Sheet Strength 61
Operating Performance 62
Business Profile 63
Rating Takaful Insurance Companies 64
Main Characteristics of Takaful Companies 64
Two Separate Funds – a Two-Stage Risk-Based Capital Approach 65
Other Balance Sheet Issues 65
Operating Performance Issues in a Takaful Company 66
Insurance-Linked Securities 68
Rating Performance Statistics 69
Rating Distribution 69
Credit Rating Performance Statistics Through Year-End 2010 71
Best’s Impairment Rate and Rating Transition Study – 1977 to 2010, published May 16, 2011 71

Appendices 73
Best’s Credit Rating Definitions 74
Financial Strength Ratings 74
Best’s Long-Term Issuer Credit Ratings and Long-Term Debt Ratings 75
Best’s Short-Term Issuer Credit Ratings and Short-Term Debt Ratings 76
Affiliation Codes and Rating Modifiers 77
Affiliation Codes 77
Rating Modifiers 78
Not Rated (NR) Category 79
Best's Analytical Reports – Quantitative Analysis Report (GAAP) 80
Organization Types 84
Insurance Licenses 85
Glossary 87
Balance Sheet Terms 87
Income Statement Terms 87
Criteria Reports 89

Best’s Credit Rating Methodology _____________________________________________ 5

Global Life and Non-Life Insurance Edition
Introduction
Purpose of Document
Best’s Credit Rating Methodology provides a comprehensive explanation of Best’s rating
process, including highlights of the rating criteria employed by A.M. Best Company in
determining Best’s Credit Ratings, which include Best’s Financial Strength, Issuer Credit and
Debt Ratings within the insurance industry. The report describes the rating process in detail,
from the types of information typically gathered and reviewed, to the key financial metrics and
qualitative factors considered in the analytical process, to the dissemination of public ratings.
The report summarizes A.M. Best’s rating approach and the key components of our analytical
framework, including risk management and other qualitative factors, for the evaluation of

operating insurance companies, material non-insurance subsidiaries, holding companies, and
groups, that are the core of our rating assessment.
Given its extensive knowledge of the insurance industry, A.M. Best utilizes a broad and deep
portfolio of both quantitative and qualitative measures to analyze the organizations we rate.
These measures and the rating processes are regularly reviewed and enhanced through a
formalized, criteria review process. Enhancements are then disseminated through criteria
papers addressing specific issues or components of the rating process. The most current
rating criteria can be accessed through A.M. Best’s website
www.ambest.com/ratings/methodology. The ongoing review and development of rating
criteria is managed by A.M. Best’s Corporate Rating Policy Committee (CRPC). The CRPC is
responsible for ensuring that A.M. Best continuously uses credit rating criteria and
methodologies that are rigorous, systematic, and where possible, result in ratings that can be
subject to some form of objective validation based on historical experience. The CRPC is also
responsible for the establishment and maintenance of all A.M. Best policies and procedures
related to the credit rating process.
Usage of Best's Ratings
Best's Credit Ratings are proprietary and may not be reproduced without permission from
A.M. Best. A company assigned a Best's Credit Rating should review the Guide to Proper Use,
which outlines the acceptable parameters of the use of these ratings. All queries regarding the
use of proprietary information or to obtain a licensing agreement or a letter of consent should
be directed to: A.M. Best Company, Office of Intellectual Property, Ambest Road, Oldwick,
New Jersey 08858.
While Best's Credit Ratings reflect our opinion of a company's financial strength and relative
ability to meet its ongoing senior obligations, they are not a warranty. Best’s Credit Ratings,
which include Best’s Financial Strength, Issuer Credit, and Debt Ratings, are not
recommendations to purchase, hold or terminate any insurance policy, contract, instrument,
or any other financial obligation issued by an insurer. Nor do they address the suitability of
any particular policy, contract, instrument or any other financial obligation issued for a
specific purpose or purchaser. Best’s Credit Ratings are not assigned to specific insurance
policies or contracts and do not address any other risk, including, but not limited to, an

insurer's claims-payment policies or procedures; the ability of the insurer to dispute or deny
Best’s Credit Rating Methodology _____________________________________________ 6

Global Life and Non-Life Insurance Edition
claims payment on grounds of misrepresentation or fraud; or any specific liability
contractually borne by the policy or contract holder.
A Best's Issuer Credit or Debt Rating is an opinion regarding the relative future credit risk of
an entity, a credit commitment or a debt or debt-like security. Credit risk is the risk that an
entity may not meet its contractual, financial obligations as they come due. These credit
ratings do not address any other risk, including but not limited to liquidity risk, market value
risk or price volatility of rated securities. The rating is not a recommendation to buy, sell or
hold any securities, insurance policies, contracts or any other financial obligations, nor does it
address the suitability of any particular financial obligation for a specific purpose or
purchaser. A.M. Best does not sell securities nor provide investment advice. A.M. Best is
compensated for its interactive ratings from the entities/issuers that it rates.
Best’s Credit Rating Methodology _____________________________________________ 7

Global Life and Non-Life Insurance Edition
Overview: Best’s Credit Ratings
About A.M. Best
A.M. Best Company is a global full-service credit rating agency dedicated to serving the
financial and health-care services industries. It began assigning credit ratings in 1906, making
it the first of today's rating agencies to use symbols to differentiate the relative
creditworthiness of companies. Within the insurance segment, Best’s Ratings cover
property/casualty, life, annuity, reinsurance, captive, title and health insurance companies
and health maintenance organizations (HMOs). A.M. Best provides the most comprehensive
insurance ratings coverage of any rating agency, with reports and ratings maintained on over
10,000 insurance entities worldwide, in approximately 95 countries. A.M. Best is also a well-
known and highly regarded source of information and commentary on global insurance trends
and issues through a host of other products and services.

In 1900, A.M. Best first published what became known as Best’s Insurance Reports®—
Property/Casualty Edition which reported on 850 property/casualty insurers operating in the
United States. This was soon followed by its companion volume, Best’s Insurance Reports®—
Life/Health Edition, which was published in 1906 reporting on 95 legal reserve life insurers in
the United States. Over the better part of a century, these two annual publications have
represented the most comprehensive source of financial information on domestic insurers.
The Property/Casualty and Life/Health Editions of Best’s Insurance Reports®—United States
& Canada contain over 3,200 and 2,000 insurance companies, respectively, representing
virtually all active insurers operating in the United States. In addition, these editions contain
Canadian and Caribbean property/casualty and life insurers and reports on United States,
European, and Canadian branches.
In 1984, A.M. Best embarked on completing global coverage of the insurance industry with the
publication of Best’s Insurance Reports®—Non-US Edition, which currently reports, in CD-
ROM format, on over 5,000 international property/casualty and life/health companies.
In 1999, A.M. Best expanded its rating assignments to include debt and insurance-linked
securities. The issuance of securities ratings for insurers and insurance holding companies is a
natural extension of our expertise in providing financial strength ratings and reports on
insurance organizations to investors, analysts and policyholders. This focus also serves as the
foundation for which ratings are issued to other risk-bearing institutions and entities,
including captive insurers and alternative risk transfer facilities.
Within the insurance segment, A.M. Best assigns ratings to various instruments including
debt, hybrid debt, surplus notes, preferred stock, commercial paper, collateralized debt
obligations, insurance-based liability or asset-backed securitizations and monetizations, risk-
linked securities, closed block securities and institutional investment products.
Best’s Credit Rating Methodology _____________________________________________ 8

Global Life and Non-Life Insurance Edition
Best’s Credit Ratings Within the Insurance
Segment
Best's Credit Ratings are independent opinions regarding the creditworthiness of insurance

entities, issuers, and securities. Best's Credit Ratings are based on a comprehensive
quantitative and qualitative evaluation of a company's balance sheet strength, operating
performance and business profile, and, where appropriate, the specific nature and details of a
security. A.M. Best assigns various types of credit ratings within the insurance segment,
including Financial Strength Ratings, Long-Term and Short-Term Issuer Credit Ratings, and
Long-Term and Short-Term Debt Ratings on corporate securities and insurance-related
securitizations.
Secure
A++ and A+ Superior
A and A- Excellent
B++ and B+ Good
Vulnerable
B and B- Fair
C++ and C+ Marginal
C and C- Weak
D Poor
E Under Regulatory Supervision
F In Liquidation
S Suspended
Rating Scale – FSR
Best’s Financial Strength Ratings
The Best’s Financial Strength Rating (FSR) is an
independent opinion of an insurer’s financial strength and
ability to meet its ongoing insurance policy and contract
obligations. The FSR scale is comprised of 16 individual
ratings grouped into 10 categories, consisting of three
Secure categories of “Superior,” “Excellent” and “Good”
and seven Vulnerable categories of “Fair,” “Marginal,”
“Weak,” “Poor,” “Under Regulatory Supervision,” “In
Liquidation” and “Suspended.”

Best’s Issuer Credit and Debt Ratings
Long-Term Issuer Credit Ratings and Long-Term Debt Ratings
Best's Long-Term Issuer Credit Rating (ICR) is an opinion of
an issuer/entity's ability to meet its ongoing senior financial
obligations. Best's Long-Term Debt Rating is an i
opinion of an issuer/entity's ability to meet its ongoing
financial obligations to security holders when due. Best's
rating scale used for Long-Term ICRs and Long-Term Debt
Ratings is comprised of 22 individual ratings grouped into 8
categories, consisting of four Investment Grade categor
"Exceptional," "Very Strong," "Strong", and "Adequate" an
four Non-Investment Grade categories of "Speculative,"
"Very Speculative," "Extremely Speculative", and "In
Default."
aaa Exceptional
aa Very Strong
aStrong
bbb Adequate
bb Speculative
b Very Speculative
ccc, cc, c Extremely Sp eculative
d In Default
Rating Scale –
Long-Term ICR and Debt
Non-Investment Grade
Investment Grade
ndependent
ies of
d
While the above definitions apply to entities which do not issue insurance obligations, A.M.

Best also assigns ICRs to all rated insurance companies. In addition, it should also be noted
that A.M. Best assigns Issuer Credit Ratings to publicly traded holding companies, where a
significant portion of cash flow is provided by insurance operations. The definitions applied to
insurance companies that are assigned an Issuer Credit Rating are as follows: (aaa) –
Exceptional; (aa) – Superior; (a) – Excellent; (bbb) – Good; (bb) – Fair; (b) – Marginal; (ccc,
cc) – Weak; (c) – Poor; (rs) – Regulatory Supervision/Liquidation.
Best’s Credit Rating Methodology _____________________________________________ 9

Global Life and Non-Life Insurance Edition
Short-Term Issuer Credit Ratings and Short-Term Debt Ratings
Best's Short-Term ICR and Short-Term Debt Ratings are an
opinion of an issuer/entity’s ability to meet its senior financial
obligations having original maturities of generally less than one
year. Best's Short-Term ICR and Debt Rating scale is comprised
of 6 individual ratings grouped into 6 categories, consisting of
four Investment Grade categories of "Strongest," "
"Satisfactory", and "Adequate" and two Non-Investment Grad
categories of "Speculative" and "In Default."
Outstanding,"
e
ce
AMB-1+ Strongest
AMB-1 Outstanding
AMB-2 Satisfactory
AMB-3 Adequate
AMB-4 Speculative
DIn Defaul
Short-Term ICR and Debt
Investment Grade
Non-Investment Grade

Rating Scale –
t
Rating Translation Table – FSRs and Long-Term ICRs
As highlighted in the summary definition above, an FSR is an opinion of an insurer’s ability to
meet its ongoing insurance policy and contract obligations. The analysis required for this
reflects various sources of risk, including non-insurance risks, to which the legal entity issuing
the policies is exposed. Since policyholders typically are among the senior-most creditors of an
insurer, FSRs, in practice, have been the equivalent of the ICR for operating insurers. See the
translation table below.
With the growing interest by
non-policyholders in
insurers’ creditworthiness,
A.M. Best draws a distinction
between these two ratings.
The FSR remains an opinion
specific to the insurer’s ability
to meet ongoing insuran
policy and contract
obligations, while the ICR is
an opinion as to the overall
creditworthiness of an
insurer from the perspective
of its senior creditors. This distinction is important when considering ratings other than an
FSR within an insurance organization, since ratings both of an organization’s debt issues and
of related legal entities, such as holding companies, are tied to and based on the overall
creditworthiness of the operating insurer.
FSR Long-Term ICR FSR Long-Term ICR
Secure Investment Grade Vulnerable Non-Investment Grade
aaa bb+
aa+ bb

aa B- bb-
aa- b+
a+ b
aC+b-
A- a- ccc+
bbb+ ccc
bbb ccc-
B+ bbb- cc
Dc
E and F rs
C
B++
C-
Rating Translation Table
A++ B
A+
C++
A
Ratings Initiation
A.M. Best assigns long-term FSRs and ICRs on an interactive basis. An entity is deemed to be
an interactive participant in the rating process when it requests or otherwise subscribes to
A.M. Best’s credit rating services, such as, for example, an FSR. Interactive participants and
affiliated entities within the immediate organizational structure that expose the legal entity to
risk are subject to the assignment of any type of interactive credit rating published by A.M.
Best that A.M. Best believes is appropriate and that provides transparency to interested
parties. These entities expect, and in all cases are informed of, the ratings issued by A.M. Best.
Such credit ratings may include FSRs, ICRs and debt ratings on entities, corporate securities
and insurance-related securitizations.
Best’s Credit Rating Methodology ____________________________________________ 10

Global Life and Non-Life Insurance Edition
Prior to 2010, A.M. Best also assigned Public Data Ratings (PDR), which were ratings
initiated by A.M. Best. These have been discontinued.

Best’s Outlooks, Modifiers and Financial Size Categories
A.M. Best uses various other designations to provide users of our long-term ratings additional
information about a rated entity or security, including Outlooks and Under Review modifiers.
When assigned to a company or security, the Outlook indicates the potential future direction
of the rating – FSR, ICR or Debt – over an intermediate period, generally defined as the next
12 to 36 months. An Outlook can be positive, negative or stable.
● A positive outlook indicates that a company is experiencing favorable financial and market
trends, relative to its current rating level. If these trends continue, the company has a good
possibility of having its rating upgraded.
● A negative outlook indicates that a company is experiencing unfavorable financial and
market trends, relative to its current rating level. If these trends continue, the company
has a good possibility of having its rating downgraded.
● A stable outlook indicates that a company is experiencing stable financial and market
trends, and that there is a low likelihood the company's rating will change over an
intermediate period.
Positive and negative outlooks do not necessarily lead to a change in a company's rating.
Similarly, a stable outlook does not preclude a rating upgrade or downgrade.
Potential near-term rating changes (typically within six months) due to a recent event or
abrupt change in their financial condition are signaled through the use of an Under Review
("u") modifier. This modifier is assigned once A.M. Best initiates a review to determine the
impact on the company's rating. An Under Review status can have positive, negative or
developing implications.
● A positive implication indicates that, based on information currently available, there is a
reasonable likelihood the company's rating will be raised as a result of A.M. Best's analysis
of the recent event.
● A negative implication indicates that, based on information currently available, there is a

reasonable likelihood the company's rating will be lowered as a result of A.M. Best's
analysis of the recent event.
● A developing implication indicates that, based on information currently available, there is
uncertainty as to the final rating outcome, but there is a reasonable likelihood the
company's rating will change as a result of A.M. Best's analysis of the recent event.
A company's rating remains under
review until A.M. Best is able to fully
determine the rating implications of the
event before affirming, upgrading or
downgrading the rating. Generally, a
company's rating is placed under review
for less than six months.
Class Class
I Less than 1 IX 250 to 500
II 1 to 2 X 500 to 750
III 2 to 5 XI 750 to 1,000
IV 5 to 10 XII 1,000 to 1,250
V 10 to 25 XIII 1,250 to 1,500
VI 25 to 50 XIV 1,500 to 2,000
VII 50 to 100 XV 2,000 or greater
VIII 100 to 250
Adj. PHS ($ Millions) Adj. PHS ($ Millions)
Financial Size Category
To provide a convenient indicator of the
Best’s Credit Rating Methodology ____________________________________________ 11

Global Life and Non-Life Insurance Edition
size of a company in terms of its statutory surplus and related accounts, A.M. Best assigns a
Financial Size Category (FSC) to every company that is assigned an FSR. The FSC is based on
reported policyholders’ surplus plus conditional or technical reserve funds, such as the asset

valuation reserve (AVR), other investment and operating contingency funds and
miscellaneous voluntary reserves.
Many insurance buyers consider buying insurance coverage from companies that they believe
have the sufficient financial capacity to provide the necessary policy limits to insure their risks.
Although companies utilize reinsurance to reduce their net retention on the policy limits they
underwrite, many buyers still feel more comfortable buying from companies perceived to have
greater financial capacity.
For Not Rated (NR) companies, a condition exists that makes it difficult for A.M. Best to
develop an opinion on the company's balance sheet strength and operating performance.
Generally, these companies do not qualify for a Best's Credit Rating because of their limited
financial information, small level of surplus, lack of sufficient operating experience, or due to
their dormant or run-off status.
Overview:
Best’s Interactive Credit Rating Process
The foundation of Best’s interactive credit rating process is an ongoing dialogue with the rated
company's management, which is facilitated by Best’s primary credit analysts. Each
interactively rated entity is assigned to a primary analyst, who is supervised by a team leader.
The primary analyst is charged with managing the ongoing relationship with company
management and performing the fundamental credit analysis prescribed in our rating criteria.
It is the primary analyst’s responsibility to monitor the financial and non-financial results and
significant developments for each rated entity in his/her portfolio. A rating action or review
can be considered any time A.M. Best becomes aware of a significant development, regardless
of the annual review cycle. This process typically includes the review of:
● All annual and quarterly financial statement filings (statutory and GAAP, where available,
or applicable standard in the specific market/jurisdiction), including footnotes and other
disclosures;
● Interim management reports provided by the rated entity;
● Significant public announcements made by the rated entity;
● Information requested by A.M. Best;
● Information provided by management.

This ongoing monitoring and dialogue with management occurs through formal annual rating
meetings, as well as interim discussions on key trends and emerging issues, as needed.
Management meetings afford A.M. Best's analysts the opportunity to review with the company
factors that may affect its rating, including strategic goals, financial objectives and
management practices. It is during these interactive meetings that a company typically will
share information that may be extremely sensitive or proprietary in nature.
The dialogue with management continues throughout the entire rating process, which is
described in more detail below.
Best’s Credit Rating Methodology ____________________________________________ 12

Global Life and Non-Life Insurance Edition
1. Compile Information. The rating assessment
begins with the compilation of detailed public and
proprietary financial information, including annual and
quarterly financial statements, regulatory filings,
certified actuarial and loss reserve reports, investment
detail and guidelines, reinsurance transactions, annual
business plans and Best's Supplemental Rating
Questionnaire (if necessary). This information is used by
the primary credit analyst to develop a tailored meeting
agenda for the annual rating meeting. The annual
meeting is a key source of quantitative and qualitative
information.
2. Perform Analysis. A.M. Best's analytical process
incorporates a host of quantitative and qualitative measures that evaluate various sources of
risk to an organization's financial health, including underwriting, credit, interest rate, country
and market risks, as well as economic and regulatory factors. The analysis includes
comparisons to peers, industry standards and proprietary benchmarks, as well as assessments
of operating plans, philosophy, management, risk appetite, and the implicit or explicit support
of a parent or affiliate.

3. Determine Best's Rating. An initial rating recommendation is developed based on the
analytical process outlined above. Each rating recommendation is reviewed and modified, as
appropriate, through a rigorous committee process that involves A.M. Best's analysts and
senior rating officers who possess relevant expertise. This committee approach ensures rating
consistency across different business segments and maintains the integrity of the rating
process and methodologies. The final rating outcome is determined by one or more rating
committees after a robust discussion of the pertinent rating issues and financial data.
Prior to public dissemination, the rating outcome is communicated to the company to which it
is being assigned. If the company disagrees with the rating and believes that the information
on which it was based was incomplete or misunderstood, the rating can be appealed. If
material new information is forthcoming in a timely manner, the rating may be reconsidered
by the rating committee.
4. Disseminate Best's Rating. Best's Credit Ratings are disseminated as soon as
practicable following the finalization of the rating review process. The ratings are made
available to the public via A.M. Best's Web site and through a number of different data
providers and news vendors.
5. Monitor Best's Rating. Once an interactive credit rating is published, A.M. Best
monitors and updates the rating by regularly reviewing the company’s creditworthiness. A.M.
Best's analysts continually monitor current developments (e.g. financial statements, public
documents, news events) to evaluate the potential impact on a company's rating. Significant
developments can result in a rating review, as well as modification of the rating or outlook.
The primary analyst will typically initiate a formal review of the rating upon becoming aware
of any information that might reasonably be expected to result in a rating action.
Best’s Credit Rating Methodology ____________________________________________ 13

Global Life and Non-Life Insurance Edition
Conducting a Rating Meeting
As highlighted above, meeting with the management of a company is an integral part of A.M.
Best's interactive rating process. Key executives of the rated entity should be present at the
annual rating meeting to discuss their areas of responsibility, including strategy, capital and

risk management, distribution, underwriting, reserving, investments, claims and overall
financial results and projections. Companies should be prepared to provide in advance and
discuss, in detail, a broad range of information that can vary depending on the company and
the industry in which they operate. The primary analyst typically provides a meeting agenda,
outlining discussion topics that will guide the preparation effort. A sample agenda for a
property/casualty company is provided below. Other sample agendas and lists of the
information typically requested for the following types of organizations can be accessed
through our Web site at www.ambest.com/ratings/MeetingPreparation.
● Health Companies
● Life Companies
● Property/Casualty and Captive Companies
Best’s Credit Rating Methodology ____________________________________________ 14

Global Life and Non-Life Insurance Edition
Property/Casualty Sample Meeting Agenda
● Organization Structure
o Ownership & Membership Requirements
o Overview of Corporate Structure
o Management & Board of Directors
● Corporate Governance
o Mission Statement
o Management’s Perspective on Key Risks
o Risk Management Framework—Roles, Responsibilities & Oversight
o Board Involvement
o Systems/Internal Controls
● Capital Structure (Holding Company & Operating Company)
o Composition
o Capital Management Strategy
o Capital Adequacy
o Financial Leverage/Debt Service

o Financial Guarantees
o Sources & Uses (5 Years)
o Cash & Liquidity
● Underwriting
o Product Offering(s)
o Geographic Footprint
o Limits Profile
o Base Rate & Overall Pricing Changes
o Retention
o Cycle Management Strategy
o Price Monitoring/Internal Controls
o Expansion Initiatives
o External Risk Factors
● Marketing & Business Production
o Distribution Sources
o Diversification
o Business Strategies; Short & Long Term
o Growth Strategies & Targets
● Claims & Loss Reserves
o Severity & Frequency Trends
o Claims Administration (Internal/Third Party)
o New Potential Claim Emergence
Best’s Credit Rating Methodology ____________________________________________ 15

Global Life and Non-Life Insurance Edition
o
Loss Reserves (Actuarial Report)—Carried vs. Indicated
o Management’s Perspective of Reserve Adequacy
o Asbestos & Environmental Reserve Analysis (if Applicable)
● Reinsurance/Pooling

o Pro-Rata/Per Risk Excess of Loss
o Catastrophic Reinsurance Programs
o Loss Portfolio Transfers/Aggregate Stop Loss (Contracts)
o Inter-Company Reinsurance/Pooling Agreements
o Credit Risk
o Net Retention
● Investments
o Strategy & Guidelines
o Composition
o Credit Risk—Potential Bond Issuer Default
o Capital Market Risk—Equities/Interest Rates
o Investment Manager(s)
● Financial Data
o Statutory Financial Statement(s)
o Consolidated GAAP Holding Company Financial Statement(s) (Audited if Available)
o Long-Range Pro-Forma Financials—Income Statement & Balance Sheet
● Catastrophe Management Framework
o Natural & Man-Made Catastrophe Exposure Analysis
o Catastrophe Model(s) Used
o Probable Maximum Loss (PML)/Tail Risk Analysis
o Risk Aggregation/Mapping/Geocoding
● Enterprise Risk Management*
o ERM Framework
o Risk Correlation
o Modeling Capabilities—Economic Capital/DFA/RAROC
o Risk Tolerance/Risk Management Objectives
● Other
o Regulatory
o Legislative
o Judicial

* A.M. Best’s expectation of a company’s ERM capabilities will vary depending upon an insurer’s scope of operations, size and risk
complexity. In some cases, a separate ERM meeting may be required.
The above agenda demonstrates the breadth and depth of a typical annual rating meeting and
the rating process itself. The ongoing interactive dialogue is intended to provide a thorough
understanding of not only the rated entity’s published financial statements, but the underlying
Best’s Credit Rating Methodology ____________________________________________ 16

Global Life and Non-Life Insurance Edition
strategic and operational elements that A.M. Best believes are critical to the long-term viability
of an organization.
To help facilitate the annual rating meeting and manage the ongoing relationship with A.M.
Best, companies are encouraged to select a rating agency liaison who knows the company well
and has the authority to coordinate responses to inquiries promptly.
Information Requirements
The primary source of the information is each company's annual and quarterly (if available)
financial statements, as filed with the regulatory agency of the state, province, territory or
country in which the company is domiciled. Other sources of information include, but are not
limited to: interim management reports on emerging issues; supplemental information
requested by A.M. Best; information provided through the annual rating meeting and other
discussions with management; and information available in the public domain. A sample
listing of the data required for life/health and property/casualty companies follows.
A.M. Best expects all information submitted by a company to be accurate and complete.
Information provided by a company during a rating meeting, or other interim discussions,
may be extremely sensitive and/or proprietary. A.M. Best analysts are held to the highest
standards of ethical and professional conduct in handling such information. A.M. Best has
established policies and procedures to prevent unauthorized disclosure of confidential
information and ratings prior to release. A.M. Best allows the use of confidential information
only for purposes related to its rating activities or in accordance with any confidentiality
agreements with the rated company.
Requested Data Items –

Property/Casualty & Life/Health Insurance Companies
1. Annual Reports (Latest Five Years)
2. Audited Financial Statement(s) – Consolidated And Parent Only (Annually)
3. Actuarial Report(s) Both Internal And External, When Available (Annually)
4. Organization Structure For Parent And Subsidiaries
5. Management Structure, Board Of Directors And Key Executive Committees
6. Biographical Information On Principal Officers
7. Strategic Business Plans / Five Year Projections (Assumptions) / Ownership / Capital
Resources
8. Capital Management Strategies / Investor / Sponsor Strategy
9. Competitive Advantages / Disadvantages
10. Completed Best’s Supplemental Rating Questionnaire (Annually)
11. Reinsurance Contracts
12. Catastrophe Management Strategies (P/C Companies Only)
13. Key Distribution Partners
Best’s Credit Rating Methodology ____________________________________________ 17

Global Life and Non-Life Insurance Edition
14. Company’s Investment Guidelines
15. Any Other Information Believed To Be Relevant To The Rating Process
Advance notification, including background information, of significant transactions should be
provided to the primary credit analyst. This gives the analyst, and Best’s rating committees, an
opportunity to evaluate the impact of the transaction on the company's operations, and render
a rating decision in a timely manner, if appropriate. All non-public information is considered
proprietary and will be held in the strictest confidence by A.M. Best.
Best’s Credit Rating Methodology ____________________________________________ 18

Best’s Credit Rating Methodology ____________________________________________ 19
Global Life and Non-Life Insurance Edition
Best’s

Interactive Credit Rating Methodology
Overview of Best’s Credit Rating Evaluation
The primary objective of Best’s Credit Ratings within the insurance segment is to provide an
opinion of the rated entity’s ability to meet its senior financial obligations, which for an
operating insurance company are its ongoing insurance policy and contract obligations. The
assignment of an interactive rating is derived from an in-depth evaluation of a company’s
balance sheet strength, operating performance and business profile, as compared with A.M.
Best’s quantitative and qualitative standards.
In determining a company’s ability to meet its current and ongoing obligations, the most
important area to evaluate is its balance sheet strength, since it is the foundation for financial
security. Balance sheet strength measures the exposure of a company’s equity or surplus to
volatility based on its operating and financial practices, and can be a reflection of its capital
generation capabilities resulting from earnings quality. One of the primary tools used in the
evaluation of balance sheet strength for an insurer is Best’s Capital Adequacy Ratio (BCAR),
which provides a quantitative measure of the risks inherent in a company’s investment and
insurance profile, relative to its risk-adjusted capital. A.M. Best’s analysis of the balance sheet
also encompasses a thorough review of various financial tests and ratios over five-year and in
some cases ten-year periods.
The assessment of balance sheet strength includes an analysis of an organization’s regulatory
filings, including the GAAP or IFRS balance sheet, at the operating insurance company,
holding company, and consolidated levels. To assess the financial strength and financial
flexibility of a rated entity, a variety of balance sheet, income statement, and cash flow metrics
are reviewed, including corporate capital structure, financial leverage, interest expense
coverage, cash coverage,
liquidity, capital generation, and
historical sources and uses of
capital.
While balance sheet strength is
the foundation for financial
security, the balance sheet

provides an assessment of
capital adequacy at a point in
time. A.M. Best views operating
performance and business
profile as leading indicators
when measuring future balance
sheet strength and long-term
financial stability.
The term “future” is the key, since ratings are prospective and go well beyond a “static”
balance sheet view. Profitability is the engine that ultimately drives capital, and looking out
into the future enables the analyst to gauge a company’s ability to preserve and/or generate

Global Life and Non-Life Insurance Edition
new capital over time. In many respects, what determines the relative strength or weakness of
a company’s operating performance is a combination of its business profile and the ability of a
company to effectively execute its strategy.
A company exhibiting strong performance, over time, will generate earnings sufficient to
maintain a prudent level of risk-adjusted capital and optimize stakeholder value. Strong
performers are those companies whose earnings are relatively consistent and deemed to be
sustainable. Companies with a stable track record and better-than-average earnings power
may receive higher ratings and have lower risk-adjusted capital relative to their peers.
On the other hand, companies that have demonstrated weaknesses in their earnings – through
either consistent losses or volatility – are more likely to struggle to maintain or improve
capital in the future. For these reasons, these companies typically are rated lower than their
counterparts that perform well and usually are held to higher than minimum capital
requirements to minimize the chance of being downgraded if current trends continue.
A.M. Best believes that risk management is the common thread that links balance sheet
strength, operating performance and business profile. Risk management fundamentals can be
found in the strategic decision-making process used by a company to define its business
profile, and in the various financial management practices and operating elements of an

insurer that dictate the sustainability of its operating performance and, ultimately, its
exposure to capital volatility. As such, if a company is practicing sound risk management and
executing its strategy effectively, it will preserve and build its balance sheet strength and
perform successfully over the long term – both key elements of Best’s ratings and the
evaluation of risk management.
Best’s Credit Rating Approach:
Top-Down and Bottom-Up
A.M. Best assigns various types of credit ratings (FSRs, ICRs, and debt ratings) to
organizations of all different shapes and sizes – from single legal-entity organizations to
complex multi-national organizations with diversified insurance and non-insurance
operations, multiple intermediate holding companies, all under a publicly-traded or privately
held ultimate holding company.
Best’s fundamental rating approach for the assignment of any Best’s Credit Rating is to
examine an organization from both the top-down and the bottom-up. As a result, the analysis
performed incorporates an assessment of material sources of risk to the rated entity.
The top-down analysis includes the exposure to risk generated by activities at the
parent/holding company; such as the potential strain on the operating entity from debt-
servicing requirements related to the parent’s borrowings, as well as the benefits of earnings
diversification that may come from being a member of a diversified organization. For the non-
rated subsidiaries, A.M. Best performs a detailed internal analysis of their risk profile and
resulting effect on the rated entities within the group, including A.M. Best’s judgment as to the
exposure of that entity to debt or other borrowings at the holding company level.
The bottom-up analysis focuses on an assessment of the risks generated directly by the
operations of the rated entity itself, as well as any other rated affiliates. For insurers, this
analysis includes an assessment of underwriting, credit, interest rate, market and other risks
Best’s Credit Rating Methodology ____________________________________________ 20

Global Life and Non-Life Insurance Edition
at the operating company level. The primary objective of this overall approach is to gain a
broad understanding of the potential impact on the current and future balance sheet of the

rated operating entity – both from its own operations and those of its parent and affiliates – in
support of the assignment of an ICR on the rated operating entity, which is referred to as an
Operating Company ICR.
The Operating Company ICR is the foundation for the Operating Company FSR (if
the rated operating entity is an insurance company) and the Holding Company ICR. The
Operating Company FSR is
determined using the Rating
Translation Table presented earlier
in this document, effectively
converting the rating from the ICR
scale to the FSR scale. If an insurer
issues public debt, A.M. Best will
assign a rating specific to its view of
the credit quality of the debt issue.
The debt rating is established by
reference to the Operating
Company ICR. For debt issued by
an operating insurance company, the
rating will reflect the degree of
subordination of the debt issue to the senior obligations of the insurer, typically insurance
policies and contracts.
A.M. Best’s Rating Approach
Top-Down and Bottom-Up
Top-Down
Bottom-Up
Operating Company ICR
Holding Company Non-Rated Business
Rated Operating
Company (Standalone)
Rated Affiliates

A.M. Best’s Rating Approach
Top-Down and Bottom-Up
Top-Down
Bottom-Up
Operating Company ICR
Holding CompanyHolding Company Non-Rated BusinessNon-Rated Business
Rated Operating
Company (Standalone)
Rated Operating
Company (Standalone)
Rated AffiliatesRated Affiliates
A Holding Company ICR reflects the fact that it is a discrete legal entity from the operating
insurer. Since a holding company typically does not generate significant earnings independent
from subsidiary operations, this legal separation from the operating company represents an
added degree of risk, especially in terms of the actual or potential control a regulator may
apply to the movement of funds from
an operating insurer to a holding
company. Moreover, the policyholders
of an operating insurer usually have
seniority over creditors of the holding
company. The greater degree of risk
taken by senior unsecured creditors of
the holding company, relative to those
of the operating company, is reflected
in the holding company typically being
assigned a lower ICR than the o
company.
A.M. Best’s Rating Approach
Relationship Between FSR and ICR
Notching

Translation
Operating
Company FSR
Holding
Company ICR
Operating
Company ICR
A.M. Best’s Rating Approach
Relationship Between FSR and ICR
Notching
Translation
Operating
Company FSR
Holding
Company ICR
Operating
Company ICR
perating
For highly rated operating companies, Holding Company ICRs usually are two or three
notches lower. Further down the rating scale, this may extend to four or five notches.
Conversely, for the very strongest organizations, with diversified operations, this notching
could be reduced to zero (i.e., if after taking into account the risks highlighted above, the credit
profile of the holding company still was consistent with a rating of “aaa”). For further details
on the relationship between the Operating Company ICR and Holding Company ICR
and debt ratings, see the discussion of Key Components of Best’s Credit Rating Process –
Holding Company Analysis.
Best’s Credit Rating Methodology ____________________________________________ 21

Global Life and Non-Life Insurance Edition
Key Components of Best’s Credit Rating

Evaluation – Operating Company Analysis
As part of Best’s bottom-up rating approach – supporting the assignment of an Operating
Company ICR – every legal entity that maintains an A.M. Best rating is reviewed initially on
a stand-alone basis. The entity’s strengths and weaknesses are analyzed, without any benefit
or drag from its affiliation with a larger organization. Employing this approach allows A.M.
Best to gauge the level of policyholder security with no benefit from parental support. After the
stand-alone analysis is completed, the potential impact of the operations of the holding
company, non-rated affiliates and other rated affiliates, which are evaluated individually on a
stand-alone basis using the same approach and metrics, is incorporated into the
determination of the final Operating Company ICR.
As mentioned earlier, the assignment of an interactive Best’s Credit Rating involves a
comprehensive quantitative and qualitative analysis of a company’s balance sheet
strength, operating performance and business profile. For our interactive Best’s
Credit Ratings, we believe this balanced method of evaluating a company on both quantitative
and qualitative levels provides better insight of a company and results in a more discerning
and credible rating opinion.
The interpretation of quantitative measurements involves the incorporation of more
qualitative considerations into the process that may impact prospective financial strength. Our
quantitative evaluation is based on an analysis of each company’s reported financial
performance, utilizing over 100 key financial tests and supporting data. These tests, which
underlie our evaluation of balance sheet strength and operating performance, vary in
importance depending upon a company’s characteristics.
In assigning a Best’s FSR, additional consideration is given to balance sheet strength for those
companies that are exposed to shorter-duration liabilities (less than 2-3 years) or those
companies maintaining an extremely strong balance sheet. Companies with short-duration
liabilities are exposed to fewer potential losses, reducing long-term risk. Alternatively, those
companies exposed to long-duration liabilities (over 7 years) face greater uncertainty and risk,
hence, more importance is placed on operating performance, which will need to be strong to
sustain or enhance balance sheet strength over the long term. Companies with an extremely
strong balance sheet are given additional consideration if their weak profitability improves.

A company’s quantitative results are compared with industry composites as established by
A.M. Best. Composite standards are based on the performance of many insurance companies
with comparable business mix and organizational structure. In addition, industry composite
benchmarks are adjusted from time to time for systemic changes in underwriting, economic
and regulatory market conditions to ensure the most effective and appropriate analysis.
Balance Sheet Strength
In determining a company’s ability to meet its current and ongoing senior obligations, the
most important area to evaluate is its balance sheet strength. An analysis of a company’s
underwriting, financial, operating and asset leverage is very important in assessing its overall
balance sheet strength.
Balance sheet strength measures the exposure of a company’s surplus to its operating and
financial practices. A highly leveraged or poorly capitalized company can show a high return
Best’s Credit Rating Methodology ____________________________________________ 22

Global Life and Non-Life Insurance Edition
on equity/surplus, but may be exposed to a high risk of instability. Conservative leverage or
capitalization enables an insurer to better withstand catastrophes, unexpected losses and
adverse changes in underwriting results, fluctuating investment returns or investment losses,
and changes in regulatory or economic conditions.
Underwriting leverage is generated from current premium writings, annuity deposits,
reinsurance and loss or policy reserves. A.M. Best reviews these forms of leverage to analyze
changes in trends and magnitudes. To measure exposure to pricing errors in its book of
business, we review the ratio of gross and net premiums written to capital. To measure credit
exposure and dependence on reinsurance, we review the credit quality of a company’s
reinsurers and ratio of reinsurance premiums and reserves ceded and related reinsurance
recoverables to surplus. To measure exposure to unpaid obligations, unearned premiums and
exposure to reserving errors, we analyze the ratio of net liabilities to surplus.
In order to assess whether or not a company’s underwriting leverage is prudent, a number of
factors unique to the company are taken into consideration. These factors include type of
business written, spread of risk, quality and appropriateness of its reinsurance program,

quality and diversification of assets, and adequacy of loss reserves.
A.M. Best reviews a company’s financial leverage in conjunction with its underwriting
leverage in forming an overall opinion of a company’s balance sheet strength. Financial
leverage through debt or debt-like instruments (including financial reinsurance) may place a
call on an insurer’s earnings and strain its cash flow. Similar to underwriting leverage,
excessive financial leverage at the operating or holding company can lead to financial
instability. As such, the analysis is conducted both at the operating company and holding
company levels, if applicable.
To supplement its assessment of financial leverage, A.M. Best also reviews a company's
operating leverage. A.M. Best broadly defines operating leverage as debt (or debt-like
instruments) used to fund a specific pool of matched assets. Cash flows from the pool of assets
are expected to be sufficient to fund the interest and principal payments associated with the
obligations, substantially reducing the potential call on an insurer’s earnings and cash flow. In
other words, the residual risk to the insurer would be insignificant as long as the insurer
possesses sound asset/liability, liquidity and investment risk management capabilities;
exhibits low duration mismatches; and minimizes repayment and liquidity risk relative to
these obligations. Best has established specific tolerances for operating leverage activities that
are applied at each operating company, as well as at the consolidated level. Generally, debt
obligations viewed by A.M. Best as eligible for operating leverage treatment would be excluded
from the calculation of financial leverage, unless one of the tolerance levels is exceeded.
A.M. Best also evaluates asset leverage, which measures the exposure of a company’s
surplus to investment, interest rate and credit risks. Investment and interest rate risks
measure the credit quality and volatility associated with the company’s investment portfolio
and the potential impact on its balance sheet strength.
A company’s underwriting, financial and asset leverage is also subjected to an evaluation by
Best’s Capital Adequacy Ratio (BCAR) which calculates the net required capital to support the
financial risks of the company. This encompasses the exposure of its investments, assets and
underwriting to adverse economic and market conditions such as a rise in interest rates,
decline in the equity markets and above-normal catastrophes. This integrated stress analysis
evaluation permits a more discerning view of a company’s relative balance sheet strength

compared to its operating risks. The BCAR is based on audited financial statements and
Best’s Credit Rating Methodology ____________________________________________ 23

Global Life and Non-Life Insurance Edition
supplemental information provided by companies. The BCAR result is an important
component in determining a company’s balance sheet strength. A.M. Best also views insurance
groups on a consolidated basis and assigns a common BCAR result to group consolidations or
multiple member companies that are linked together through intercompany pooling or
reinsurance arrangements.
Capitalization Tests for Life Companies
● Change in Net Premiums Written (NPW) and Deposits: The annual percentage change in
net premiums written and deposits. This test is a measure of growth in underwriting
commitments.
● NPW and Deposits to Total Capital: Net premiums written and deposits related to capital
and surplus funds, including asset valuation reserve (AVR). This reflects the leverage, after
reinsurance assumed and ceded, of the company’s current volume of net business in
relation to its capital and surplus. This test measures the company’s exposure to pricing
errors in its current book of business.
● Capital & Surplus to Liabilities: The ratio of capital and surplus (including AVR) to total
liabilities (excluding AVR). This test measures the relationship of capital and surplus to
the company’s unpaid obligations after reinsurance assumed and ceded. It reflects the
extent to which the company has leveraged its capital and surplus base. On an individual
company basis, this ratio will vary due to differences in product mix, balance sheet quality
and spread of insurance risk.
● Surplus Relief: The relationship of commissions and expense allowances on reinsurance
ceded to capital and surplus funds. The use of surplus relief can be the result of “surplus
strain,” a term used to describe any insurance transaction wherein the funds collected are
not sufficient under regulatory accounting guidelines to cover the liabilities established.
● Reinsurance Leverage: The relationship of total reserves ceded plus commissions and
expenses due on reinsurance ceded plus experience rating and other refunds due from

reinsurers, plus amounts recoverable from reinsurers to total
capital and surplus.
A++ 175%
A+ 160%
A 145%
A- 130%
B++ 120%
B+ 110%
B 100%
B- 90%
C++ 80%
C+ 70%
C 60%
C- 50%
D0%
Secure FSRVulnerable FSR
Life/Health
BCAR Guidelines
● Change in Capital: The annual percentage change in the sum o
current year capital and surplus, plus AVR, plus voluntary
investment reserves, over the prior year’s sum.
f
● Best's Capital Adequacy Ratio (BCAR): The BCAR compares an
insurer's adjusted surplus relative to the required capital
necessary to support its operating and investment risks.
Companies deemed to have "adequate" balance sheet strength
normally generate a BCAR score of over 100% and will usually
carry a Secure Best's Credit Rating. However, the level of
capital required to support a given rating level varies by
company, depending on its operating performance and

business profile.
Adjusted surplus is reported surplus plus/minus adjustments
made to provide a more comparable basis for evaluating balance sheet strength. Such
modifications include adjustments related to equity in unearned premiums, loss reserves and
assets. Certain off-balance sheet items are also deducted from reported surplus, such as
encumbered capital, debt service requirements, potential catastrophe losses and future
operating losses.
Best’s Credit Rating Methodology ____________________________________________ 24

Global Life and Non-Life Insurance Edition
Net Required Capital is calculated as the necessary level of capital to support four broad risk
categories, including C1 (Asset Risk); C2 (Underwriting Risk); C3 (Market/Interest Rate Risk);
and C4 (Business Risk). Net Required Capital represents the arithmetic sum of capital
required to support each of the risk categories reduced by a covariance adjustment. The
covariance adjustment reduces a company's total capital requirement by recognizing that risks
associated with many of the four categories are independent and do not occur at the same
time.
Generally, over two-thirds of a life insurance company's net capital requirement is generated
by C1 and C3 risks. Conversely, over two-thirds of a health company’s net capital requirement
is generated by C1 and C2 risks. The Underwriting Risk components are influenced by a
company’s business profile which includes distribution of premium by line and size.
Capitalization Tests for Health Companies
● Liabilities to Assets: The ratio of total liabilities to total assets. This test measures the
proportion of liabilities covered by a company’s asset base.
● Net Premiums Written to Capital: The ratio of premiums to total capital and surplus. This
test measures the leverage associated with the level of premiums compared to the total
capital and surplus of the company. The higher the number, the more leveraged the
company.
● Debt to Capital & Surplus: The ratio of a company’s total debt to its total capital and
surplus. In this ratio, debt is defined as loans and notes payable on both a current and

long-term basis, as well as surplus notes.
● Equity PMPM: The ratio of capital and surplus to member months. This test measures the
amount of capital and surplus spread over a company’s membership base.
● Capital & Surplus to Total Assets: The ratio of total capital and surplus to total assets. This
test measures the relationship of a company’s asset base to its capital and surplus.
● Months Reserves: The ratio of a company’s total capital and surplus to monthly average
total expenses. This test provides a measure of the duration of a particular company’s
capital and surplus versus its expense commitments.
● Best's Capital Adequacy Ratio (BCAR): Refer to description above for Life Companies.
Capitalization Tests for Property/Casualty Companies
● Change in Net Premiums Written (NPW): A company should demonstrate an ability to
support controlled business growth with quality surplus growth from strong internal
capital generation.
● NPW to Policyholders' Surplus (PHS): This ratio measures a company's net retained
premium in relation to its surplus. This ratio measures the company's exposure to pricing
errors in its current book of business.
● Net Liabilities to PHS: This ratio measures a company's exposures to errors of estimation
in its loss reserves and all other liabilities. The higher the loss reserve leverage the more
critical a company's solvency depends upon having and maintaining adequate reserve
levels.
● Net Leverage: This ratio measures the combination of a company's net exposure to pricing
errors in its current book of business and errors of estimation in its net liabilities after
reinsurance, in relation to surplus.
Best’s Credit Rating Methodology ____________________________________________ 25