A.M. Best Rating Methodology: Analyzing Finance Companies.
OLDWICK, N.J. -- Based on the growing trend toward convergence of the financial services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. and insurance industries, A.M. Best Co. has released the second in the series of special reports discussing its approach to analyzing non-insurance financial services affiliates of rated insurance companies.
A.M. Best's latest rating methodology, Analyzing Finance Companies, provides the analytical framework for assessing finance companies and highlights special issues particular to the industry. Such evaluations typically are performed in the course of assigning a Best's financial strength rating (FSR (Free System Resource) In Windows 3.x, the amount of unused memory in various 64K blocks reserved for managing current applications. Every open window takes some space in this area. See Windows memory limitation. ) and an issuer credit rating (ICR (Intelligent Character Recognition or Image Character Recognition) The machine recognition of hand-printed characters as well as machine printing that is difficult to recognize. ) to insurance entities within an organization.
FSRs and ICRs are assigned to an operating insurance company based on the assessment of the entity's financial strength, operating characteristics and business profile.
The assignment of an ICR to a holding company of an operating insurer or non-insurance entity reflects an analysis of the impact of the creditworthiness Creditworthiness
The condition in which the risk of default on a debt obligation by that entity is deemed low.
Eligibility of an individual or firm to borrow money. of the various insurance and non-insurance subsidiaries on the parent's credit profile.
This includes consideration of the risks associated with the holding company being a discrete legal entity and the impact of the subordination of holding company creditors to the operating company's policyholders. The FSR/ICR of an operating entity reflects A.M. Best's analysis of the extent to which the operating company operating company
A business that engages in transactions with outsiders. is supporting debt or other obligations of a holding company, and vice versa VICE VERSA. On the contrary; on opposite sides. . For non-insurance finance entities, A.M. Best performs a detailed internal analysis of their risk profile and the resulting effect on rated entities within the group.
There are two main segments within this industry: commercial finance and consumer finance. Some of the unique factors include:
--The lack of regulatory oversight of the industry creates a wider variation in reporting standards by finance companies than by other regulated financial institutions.
--Without access to low-interest funding sources, such as deposits or similar funds available to banks or insurance firms, finance companies rely more on capital markets and institutional sources of financing.
--Commercial finance companies provide alternative non-bank financing to commercial entities based on the value of the financed asset(s).
--Unlike the commercial finance segment, the consumer finance industry is highly fragmented, with many companies offering essentially the same commoditized products to consumers.
--The consumer finance companies deal with a large volume of small receivables, with more standardized product A product that conforms to specifications resulting from the same or equivalent technical requirements. NATO standardized products are identified by a NATO code number. features (repayment schedules, interest rate indexing standards, and other features pursuant to consumer protection guidelines as may exist in many countries).
--Commercial finance companies are subject to the cyclical forces specific to their respective product niches, from new competitive factors drawn into a niche by high margins, to the larger economic conditions affecting borrowers' capital spending capital spending
Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. or receivable turnover.
Key firm specific issues are assessed for finance entities, including the competitive environment, management and strategy, funding and liquidity, financial and operating leverage Operating Leverage
A measurement of the degree to which a firm or project relies on fixed rather than variable costs.
The higher the degree of operating leverage, the greater the potential danger from forecasting risk. , capital adequacy, earnings sources and stability and risk management. Each element considered fits comfortably within the traditional A.M. Best insurer rating analysis framework of balance sheet strength, operating performance and business profile.
Taken together, these factors result in a determination as to whether the given finance activities add to or potentially detract from detract from
verb 1. lessen, reduce, diminish, lower, take away from, derogate, devaluate << OPPOSITE enhance
verb 2. the financial strength and flexibility of the respective A.M. Best rated companies.
For more information on A.M. Best's rating Best's rating
A rating A.M. Best Co. assigns to insurance companies based on the company's ability to meet its obligations to its policyholders. methodologies or to download a copy of this methodology report, visit http://www.ambest.com/ratings/methodology.asp.
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.