The Make-up of the ‘Litmus Ratings Review’ (‘LRR’) Cohorts
The three cohorts covered within the LRR are chosen to provide a representative picture of the credit profile of the international reinsurance & specialty lines sector. As the LRR is a ratings-focussed publication the nature of each group’s business profile as that relates to ratings plays a role in its inclusion overall and the cohort it is assigned to.
The ‘Commercial Majors’
Groups with substantial international commercial lines operations, typically active in providing ‘global programs’.
The ‘Reinsurance Majors’
Either non-life reinsurance groups that we regard as inherently global (including those who also write material amounts of life reinsurance business) or those globally active primary groups with material ‘third-party’ reinsurance operations.
The ‘L-Zebedees’
Either groups whose operations are highly orientated to the kind of reinsurance and speciality business written in the major hubs of London, Zurich, Bermuda, Dublin or Singapore OR sub-groups who fit this profile and who appear operationally or financially discrete from the total group profile (Odyssey Re and Sirius International being examples of the latter).
Litmus Composite Score (LCS) Methodology
Overview
The two most widely referred to rating agencies in the global reinsurance and specialty lines sector are A.M. Best and S&P. Most groups active internationally in the sector have a financial strength rating (FSR) from both agencies assigned to at least their main carriers. We highlight the rating assigned to what we would consider to be a main group carrier (or where that is not clear, a significant carrier for the group in this sector). This is described by us as the ‘group reference carrier’. Lloyd’s syndicates are not considered for this as we use the Lloyd’s market rating for LRR reporting.
We begin by producing the Litmus Score (LS). This translates each agency’s Financial Strength Rating (FSR) on the group reference carrier to a numerical score. The exact score assigned reflects both the rating and the rating outlook. As A.M. Best uses a different rating scale from S&P for FSRs we use the A.M. Best Issuer Credit Rating (ICR) assigned to the group reference carrier (and its outlook).
Where ratings from both agencies exist we then produce the Litmus Composite Score (LCS) and map that back to the S&P rating scale.
Where there is no clear outcome for the LCS mapping we use Fitch and/or Moody’s ratings as ‘tie-breakers’. If this still produces no clear outcome we then give greatest weight to the rating from whichever of S&P and A.M. Best has the lowest mean Litmus Score for the cohort from those carriers rated by both agencies.
The Litmus Score (LS)
The LS is calculated out of 100. Each notch on the S&P rating scale is covered by 4 points on the LS scale. For example, a AA- rating with a stable outlook is assigned an LS of 88, whereas an A+ rating with a stable outlook is assigned an LS of 84.
A positive or negative outlook respectively increases or decreases the LS relative to that for the stable outlook by one point.
The Litmus Composite Score (LCS)
The LCS is the arithmetic mean of the LS outcomes. Where the group reference carrier has only one rating from A. M. Best or S&P this is not assigned. We do not substitute either a Fitch or Moody’s rating in such a case as this would challenge the consistency of the calculation process (however we are very open to market participant feedback on this).
In the event that the LCS comes out at a point equidistant from the relevant ratings scale mappings (e.g. as with an LCS outcome of 86 being two points from both the AA- and A+ mappings) we employ the ‘tie-breaker’ process described later.
The Use of A.M. Best ICRs
In order to create a consistent basis of calculation we use the A.M. Best ICR issued on the group reference carrier as this is assigned using the same scale as S&P FSRs. It should be noted that we are making no judgement as to whether S&P and A.M. Best ratings are equivalent when expressed using the same scale.
A.M. Best assigns ICRs to rated carriers that issue policies at the same level as the FSR (but, as above, using the same scale that S&P uses for its FSRs). The outlook can however vary between Best’s FSR and ICR on the same rated carrier. This is because of the greater number of gradations in the S&P-type scale. For the LS and LCS calculations we use the ICR rating and outlook.
Rating Scale Mapping Tie-Breakers
Where, as noted above, the LCS comes out at a point equidistant from the relevant ratings scale mappings, we use the Fitch and/or Moody’s Insurer Financial Strength Ratings (IFSs) on the group reference carrier as the tie-breaker. Both ratings are used if both exist or just one if not.
Litmus Scores calculated from Fitch/Moody’s IFSs are not included in the LCS (as this would challenge the consistency of the calculation); rather they simply impact the selected rating scale mapping of the LCS where a tie-break on this is required. Thus, if the Fitch/Moody’s LS outcome is below that of the LCS the lower mapping is selected; and if the Fitch/Moody’s LS outcome is above that of the LCS the higher mapping is selected. In the event that neither Fitch nor Moody’s ratings on the group reference carrier exist, or that they also do not differentiate between the two mapping options, the S&P/A.M. Best rating from the agency with the lower mean LS for that cohort (on those group reference carriers rated for both) is given greater weight in deciding the mapping (this does not change the LCS).
Litmus Composite Score (LCS) Resilience Indicator (RI)
The LCS Resilience Indicator highlights how close the LCS outcome is to a rating scale mapping below its current level.
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