Corporate Finance

Insurance Company Analysis
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Fitch Learning

Introduction

The overall goal of this three-day workshop is to provide a systematic approach to the credit risk and financial strength analysis of life and non-life insurance and reinsurance companies.

Participants will be equipped to:
• Understand the business and financial risks inherent in the life and non-life insurance 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 reporting practices
• Appreciate how economic, competitive and regulatory issues impact the risk profile, performance and financial health of an insurance company
• Apply a structured approach to identify key risks and mitigants when transacting with insurance and reinsurance companies, and to appreciate the main methods of capital-raising by insurers.


Summary

CONTENT

ANALYTIC OVERVIEW

A structured approach to the credit analysis of insurance and reinsurance companies and an overview of how insurance companies are assessed by different market observers.
• Purpose / payback model: a structured approach to credit analysis and its applicability to insurance and reinsurance companies
• Insurance ratings: insurer financial strength and credit ratings, ratings of group members, derivation of various "issue ratings" from the issuer's default rating
• Use of debt and equity market indicators to highlight possible concerns.

Case study:

Purpose and payback sources for a major insurance group; using capital market data to identify insurers which are in or out of favour with investors.

OPERATING ENVIRONMENT

A review of the key macro-economic and sector trends which may impact adversely or favourably on certain insurers and business lines, and a look back at how the life, non-life and reinsurance sectors have previously been affected by stressed operating conditions.

Macro-economic and sector issues
• Investment cycles: stock, property and credit market levels and their 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 inflation and cultural changes in litigation
• Non-life reserving issues: redundancy or deficiency; asbestosis and environmental liabilities
• Competitive factors: market fragmentation; penetration levels in emerging vs. mature markets.

Regulation and supervision
• Key methods of regulating insurance companies: minimum solvency margin, investment and business restrictions
• EU Solvency I and II; overview of US and Bermuda regulation; Solvency II equivalence
• Group supervision and group solvency: double leverage in financial conglomerates, capital requirements of non-insurance businesses, EU Insurance Groups Directive (IGD)
• Degree of comfort from quality of supervision
• Exercises: historic and prospective impact of the operating environment on life and non-life insurers and reinsurers; Double Leverage and weak group structures.

FINANCIAL FUNDAMENTALS

The derivation from the financial statements of key indicators for assessing financial strength and performance against appropriate benchmarks.

Statement logic
• Review of key items in financial statements
• Key accounting methods and their uses: regulatory returns, IFRS Phases I and II; GAAP and embedded value reporting
• Items subject to management discretion: write-downs, IFRS Fair Value hierarchy, temporary and permanent impairments, reserving for IBNR claims (non-life) and for investment guarantees (life).

Business risk
• Investment risk: quality and liquidity of the investment portfolio, asset and liability matching, cost of investment guarantees, use of derivatives for hedging, concentration risks
• 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
• Non-life reserve adequacy: loss reserve development triangles, calendar year vs. accident year analysis, survival ratios etc.
• Catastrophe and reinsurance risk: degree of reinsurance utilisation; adequacy of reinsurance cover, credit and dispute risk
• Life insurance risks: persistency, mortality and expenses.

Case study:

Assessing investment and underwriting risk and performance for a composite insurance company.

Performance measurement
• 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, liquidity of investments, liquidity shocks
• Capital adequacy: regulatory solvency coverage; stress testing; quality and fungibility of capital; tangible vs intangible capital; simple capital measures e.g. free asset ratio, operating leverage, asset and liability leverage
• Financial leverage, interest cover, use of hybrid capital, refinancing risk, debt servicing ability, total commitments including off-balance sheet
• Exercise: key financial indicators for strong and weak life companies.

Case study:

Assessing leverage, solvency and liquidity for a composite insurance company.

Management and Early Warning Signals

A structured approach to assessing management; implications of the ownership structure; and early warning signals of credit deterioration.

Management
• Framework for assessing management, strategy and governance risk
• Significance of ownership: mutuals, public, state and private companies.

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

Case study:

A strongly-rated insurer which failed. Quantitative and qualitative signs of weakness.

STRUCTURE

Review of the funding needs of insurance companies, how these might be met, and the potential risk mitigants for counterparties.
• Funding needs of insurance companies
• 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 vs. policyholder rights and the impact of ranking and structure
• Exercise: recovery prospects for different issues and issuers.

Case study:

maximum hybrid issuance to obtain rating agency equity credit


Dates Avaliable


14th - 16th

March

2018

23rd - 25th

May

2018

Requirements


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.

Overview

  • Location: London
  • Telephone: 0333 443 2709
  • Residential: No
  • Course Title: Insurance Company Analysis
  • Duration: 3 Days
  • Cost: £2515 (Ex VAT)
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