Ratings agency A.M. Best has now released Best’s Insurance-Linked Securities & Structures Methodology (BILSM) after the termination of the public comment period. The publication of the new methodology contains “minor changes,” but that could impact the rating of at least one ILS transaction, says A.M. Best.
In May 2016, A.M. Best published Best’s Insurance-Linked Securities & Structures Methodology (BILSM), a draft document for public comment that outlines the ratings agency’s approach to rating insurance-linked securities and insurance-linked structures (ILS).
Following the end of the public comment period A.M. Best has now released a new version of the publication, which has some “minor changes” in relation to the previously released version.
The BILSM is designed to provide readers with insight and information regarding “key rating considerations, risk modelling and surveillance activities that are generally applied by A.M. Best to rate ILS transactions, including the rating of ILS funds and their obligations.”
The rating agency explains that owing to changes made to default tables within the BILSM, “at least one rating may be impacted.”
While we can’t be certain, it’s likely that A.M. Best is referring to three tranches of notes that were issued by 321 Henderson Receivables V LLC (Series 2008-3), which the rating agency recently placed under review following the release of the new methodology, as reported on Business Wire.
However, it’s worth noting that this isn’t a typical ILS transaction when compared to catastrophe bonds, collateralised reinsurance and other ILS structures.
Changes in the new release include that the ‘Best’s Idealized Default Rates of Insurers; and ‘Best’s Idealized Default Matrix’ have been replaced by ‘Best’s Idealized Issuer Default Matrix’ and ‘Best’s Idealized Issue Default Matrix,’ respectively.
Furthermore, the ratings agency explains that concurrent to the new release, two criteria procedures are being retired, being the ‘Best’s Idealized Default Matrix’ and ‘Securitization of Reinsurance Recoverables.’
Also, as A.M. Best noted in its release of the draft document, “The default matrices found in BILSM will supersede all existing versions of default matrices in currently published criteria procedures, making the separate criteria procedure, ‘Best’s Idealized Default Matrix,’ redundant.”
Regarding the retirement of the ‘Securitization of Reinsurance Recoverables’ criteria, “A.M. Best does not currently have any outstanding ratings utilizing the ‘Securitization of Reinsurance Recoverables’ criteria procedure. Accordingly, no ratings will be impacted by the retirement of this criteria procedure.”
With changes to the previous document only minor the new BILSM still underlines that A.M. Best differentiates between ILS transactions, calling them either ILS convergence of ILS non-convergence transactions. Along with highlighting different types of ILS structures that are common with deals, and also the types of ratings assigned.
Furthermore, the new BILSM provides readers with key rating drivers and considerations, the use of modelling results, the assignment of a rating and its monitoring activities.
As Artemis noted at the time of the draft publication not every ILS transaction or structure would be rated using this methodology, as certain transactions that operate more like an insurance company would be evaluated based on Best’s Credit Rating Methodology (BCRM).
For investors and counterparties seeking more information and transparency for ILS transactions and securities, a greater volume of rated ILS transactions could serve as a valuable benchmark and provide confidence within the asset class.
So it could prove useful and support market development that A.M. Best has decided to publish its ILS rating methodology.
Now that A.M. Best has listened to the marketplace and released the updated version of BILSM, it will be interesting to see how valuable it will be in providing market players with insight and information regarding the issuance of ILS securities and their ratings.