A.M. Best Comments on the Impact of NAIC Reinsurance Collateral Proposal.

OLDWICK, N.J. -- A.M. Best Co. has reviewed the potential impact of the NAIC's Reinsurance Evaluation Office proposal that will grant credit for ceded reinsurance. As a result of that review, A.M. Best expects that there are only a handful of U.S. property/casualty companies that will see a material negative impact on their Best's Capital Adequacy Ratio (BCAR) if collateral for reinsurance recoverables was changed. This review was conducted by recalculating each individual company's BCAR after removing all of the credit for collateral currently included in the capital model.

A material impact was defined as lowering BCAR by more than five points

and resulting in a BCAR below 175. This criteria was used for the sake of this study. A BCAR score of 175 typically can support A.M. Best's highest ratings depending on a company's operating performance and business profile. Accordingly, many companies considered to face a material impact as defined in this study may face little actual rating pressure.

There also may be a few companies that currently maintain marginal capitalization for their rating. For those companies, less collateral could be material to their rating despite a small change in BCAR that is acceptable in this study. A.M. Best believes there are likely other more important issues that impact our view of the capitalization of those companies.

Of the 895 property/casualty ratings assigned by A.M. Best within the United States, only 45 organizations, or 5% of the U.S. property/casualty ratings, would see a material change in their BCAR score. Those companies that have the greatest chance of seeing a material impact from the proposal have ceded leverage of greater than 2.0 or have sizable recoveries from unrated foreign reinsurers.

Although the analysis is based on the removal of all credit for collateral within BCAR, the REO proposal does not allow for complete elimination of collateral in most cases. Additionally, the REO proposal clearly allows companies to maintain collateral at their own discretion within their reinsurance program.

While this study focused solely on property/casualty companies, A.M. Best notes that the REO proposal is not expected to be a significant issue for the life/health insurance industry. U.S. life/health industry reinsurance recoverables over the last several years have hovered at about 6% of statutory capitalization, much lower than the 60% ratio for property/casualty companies. Nevertheless, there could be selected life/health companies for which this proposal may have a rating impact.

For Best's Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.