Prior to 1989, smaller, regional insurance companies were not rated by a nationally recognized rating service. To assist smaller, regional insurance companies, Demotech, Inc. developed a Financial Stability Analysis Model and presented this model to Fannie Mae, Freddie Mac, and HUD so cut-through and reinsurance endorsements could be eliminated on property insurance policies issued by a (previously) unrated insurance company. We were the first company to have its rating methodology formally reviewed and accepted by these multi-billion dollar enterprises.
Since the date of their respective acceptances, Fannie Mae, Freddie Mac, and HUD permit sellers and servicers to utilize any of their accepted rating services. You can utilize Demotech as an additional resource for property insurance ratings. Exclusive use of the ratings of competitor rating services is no longer a Fannie Mae, Freddie Mac, or HUD requirement.
We rely on the truth and accuracy of information contained in the annual statements filed with the State Departments of Insurance.
Our Financial Stability Analysis Model® involves a tactile review as well as computation and analysis of critical financial ratios to determine the current and future financial stability of the property insurance company being reviewed.
We generally require the following to prepare a Financial Stability Rating®:
Five years of annual statements
Latest independent audit
Latest actuarial opinion and report
Latest Management's Discussion and Analysis
Our Financial Stability Analysis Model® cross checks, and analyzes hundreds of financial statement calculations and relationships. Some of them are outlined below:
Annual and Quarterly Statements of the Insurer, its Parent Company and its Subsidiaries
Changes in the Composition of Assets and Liabilities
Changes in Working Capital
Changes in the Restricted Cash and Receivables from Affiliates
Comparison of Actual versus Budget Operating Results
Capital Contributions from Holding or Parent Company
Quite often we have the opportunity to familiarize ourselves with the background of key officers and independent contractors, which offers valuable qualitative information for consideration. This allows for more robust analysis than a purely quantitative analysis.
Financial Ratio Calculation
A major item to determine the financial stability of a P&C insurer is the calculation of financial stability ratios measured against our financial stability tests. These ratios and tests have been sampled on an industry wide basis and have been substantiated by other firms as well as Demotech.
To determine the predictability and reliability of the financial analysis, a series of solvent and insolvent property and casualty insurers were subjected a retrospective assessment to challenge our ratios and tests. This assessment confirmed that Demotech's Financial Stability Analysis Model® would have flagged property and casualty insurers that became insolvent at least one year in advance of formal regulatory action.
The basic information to develop our ratios is readily available from GAAP or statutory statements. Our strategic weighting of ratios to arrive at a final score is based on regression analysis and multi-variate analysis. The formula is proprietary and cannot be released.
Some of the Balance Sheet and Income Statement items reviewed include but are not limited to:
Total Current Assets
Total Assets
Working Capital
Total Current Liabilities
Total Liabilities
Surplus
Administrative Expenses
Total Revenues
Net Income
Receivables, including Reinsurance
Total Expenses
Amount of Business Written
Financial stability is, in our opinion, independent of size. Small, well managed property and casualty insurers can have better financial stability than larger, highly leveraged property and casualty insurers.
The latest available information, such as rating changes, additional insurers or quarterly financial information on insurers is located on our web site, www.Demotech.com. We review and revise Financial Stability Ratings® on a regular basis. Website information supersedes previously published Financial Stability Ratings®.
Demotech Financial Stability Ratings® Definitions
A" (A double prime)
Unsurpassed financial stability
Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating ® of "A double prime" possess Unsurpassed financial stability related to withstanding a general economic downturn or deterioration of an underwriting cycle. The distinction between A double prime and A prime may be related to the magnitude of policyholders' surplus, market share or national presence.
A' (A prime)
Unsurpassed financial stability
Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating® of "A prime" possess Unsurpassed financial stability related to withstanding a general economic downturn or deterioration of an underwriting cycle.
A
Exceptional financial stability
Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating® of "A" possess Exceptional financial stability related to withstanding a general economic downturn or deterioration of an underwriting cycle.
S
Substantial financial stability
Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating® of "S" possess Substantial financial stability related to withstanding a general economic downturn or deterioration of an underwriting cycle.
M
Moderate financial stability
Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating® of "M" possess Moderate financial stability related to withstanding a general economic downturn or deterioration of an underwriting cycle.
L
Licensed
Insurers earning a Financial Stability Rating® of "L" are Licensed by state regulatory authorities, and, in our opinion, the ability of these insurers to withstand a general economic downturn or deterioration in the underwriting cycle is below average.
Since 1985, Demotech, Inc. has been a financial analysis and actuarial consulting firm serving the needs of the property and casualty industry. Demotech was the first company to have its rating process formally reviewed and accepted by Fannie Mae, Freddie Mac, and HUD.
Visit www.Demotech.com for more information about Financial Stability Ratings® and Demotech, Inc.
