Insurance Company Analysis

Course Objectives

Participants will be equipped to:

• Understand the business and financial risks inherent in the life, non-life and reinsurance industries.
• Use qualitative and quantitative analysis and market indicators to distinguish strong and weak performers by sector and to detect early warning signals of deteriorating financial strength.
• Analyse and stress test financial statements in the context of differing accounting standards and business practices.
• Appreciate how economic, competitive and regulatory issues impact the risk profile, strategy and financial health of an insurance company.
• Apply a structured approach to identify key risks and mitigants when dealing with insurance companies.

Target Audience

The workshop is designed for fixed income, banking, insurance and credit risk professionals. It is targeted at an intermediate level and assumes a basic understanding of accounting and insurance products. The one-day workshop Introduction to Insurance Financial Statements is designed as a preparation for those with limited experience of insurance accounts.

The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience to see what level of prior knowledge is required for a specific course.

Content

ANALYTIC OVERVIEW

• Purpose / payback model: a structured approach to credit analysis and its applicability to insurance companies
• Insurance ratings: insurer financial strength and credit ratings, ratings of group members, loss given default, recovery ratings
• Use of debt and equity market indicators to highlight concerns.

OPERATING ENVIRONMENT

Macro-economic and sector issues

• Investment cycles: stock, property, credit markets and volatility
• Causes of recent fluctuations in strength of the life, non-life and reinsurance sectors
• Underwriting cycles in various markets
• Mortality, morbidity and longevity trends
• Climate change; trends in insured losses from catastrophes
• Impact of cultural changes in litigation
• Non-life reserving issues: redundancy or deficiency; asbestosis & environmental liabilities
• Competitive factors: market fragmentation; penetration levels in emerging versus mature markets.

Regulation and supervision

• Key methods of regulating insurance companies: minimum solvency margin, investment and business restrictions
• International differences: risk based capital vs. simple solvency measures, EU Solvency I and II, US and other local markets
• Group solvency: Insurance Groups Directive (IGD), double leverage in financial conglomerates, capital requirements of non-insurance businesses
• Degree of comfort from quality of supervision.

FINANCIAL FUNDAMENTALS

Statement logic

• Review of key items in financial statements
• Key accounting issues: regulatory returns, IFRS Phase I and II; GAAP and embedded value reporting
• Accounting discretion: write-downs, IFRS Fair Value hierarchy, temporary vs. permanent impairments, IBNR reserving.

Business risk

• Investment risk: quality and liquidity of the investment portfolio, asset and liability matching, cost of guarantees, derivatives use
• Investment returns: inclusion of realised and unrealised gains and losses, investment return requirements of the life and non-life insurance businesses
• Underwriting risk: assessing the quality and diversity of the underwriting portfolio, loss, expense and combined ratios
• Reserve adequacy: loss reserve development triangles, survival ratios etcetera
• Catastrophe and reinsurance risk: utilisation policy; adequacy of reinsurance cover, credit and dispute risk
• Control of operating expenses, fixed and variable costs.

Performance risk

• Diversity and stability of income: profitability measures and benchmarks
• Embedded value techniques for measuring and analysing life profitability, profit margins on new business, European Embedded Value (EEV) and Market-Consistent Embedded Value (MCEV), key assumptions.

Financial risk

• Liquidity: operating cash-flow, liquid investments, liquidity shocks
• Solvency: regulatory requirements and market norms, stress testing; quality and fungibility of capital, alternative capital measures e.g. free asset ratio, operating leverage, asset and liability leverage, rating agency capital models
• Financial leverage, interest cover, use of hybrid capital, refinancing risk, debt servicing ability.

Early warning signals

• Recognising financial and non-financial indicators of distress
• Accounting discrepancies: areas to check and questions to ask.

MANAGEMENT AND FRANCHISE

• Framework for assessing management and operational risk
• Organisational concerns: weak affiliates, intra-group support, contagion risk; capital and dividend flows
• Significance of franchise and ownership: mutuals, public, state and private companies.

STRUCTURE

• Funding needs of insurance companies: who is the borrower / counterparty?
• Hybrid capital securities: structure and type of capital issued; impact on credit standing and other concerns; regulatory and rating agency tolerances for hybrid capital
• Insurance-linked securities: securitisation of risks and of embedded value; use of Insurance SPVs and sidecars
• Capital structure: creditor versus policyholder rights and the impact of ranking and structure.

Workshop Times