Friday, April 8, 2011

Well Might They Keep Their Heads Down


The ratings agencies.

Hard on the heels of their failure to notice even the most egregious deficiencies in the management of the nation's finance companies, with glowing ratings published almost up to the day of receivership, we have the remarkable example of AMI.

This from the company website. Note well the date the rating was issued.

Insurance ratings

AMI Insurance Limited has an A.M. Best Company Inc. rating of A- (Excellent) effective 23 March, 2011.

For those who don't know, this rating of A- Excellent is the highest possible rating which can be given to a moderate sized company. So you can see, the good people from A.M.Best came in and did their due diligence, failed to notice the absence of adequate reinsurance, failed to notice the unhealthy concentration of risk and failed to notice the inadequacy of premium income. They just issued a 'top of the wozza' certification to a dog of a company and pocketed their fat fee. Of course the purpose of the rating is to convince an unknowing public that all is well.

Now fast forward to a company with which Adolf has considerable close experience.

Fidelity Life ------ A.M. Best rating A- Excellent

AMI is a fire and general company while Fidelity is a life and investment company. The difference between the two is chalk and cheese. Fidelity has a board of directors with both broad business and specialist life insurance experience. The company is replete with reinsurance cover on all risks and in my experience operates actuarially an extremely conservative strategy. (I'm sure they regularly 'war game' an unprecedented disaster where say 150,000 people, including all Fidelity's HO staff, are killed on one day in the Auckland CBD and Fidelity's own HQ is flattened. Who will keep the business running and where s all the money to come from?)

I'd say CEO Milton Jennings must be wondering where he can go to get a more reliable ratings agency. He might well ask the good people from A.M.Best why he should pay them good money for a junk rating certificate which tells his clients that Fidelity Life is no better managed than AMI.

Then there are some questions for the Insurance Council which, a couple of days ago, piously declared that AMI was operating within ALL the prudential limits set by the Council.


Well what a bloody waste of space is the Insurance Council.


gravedodger said...

My understanding, admittedly on the deprived side of rank amateur, is that this move is prompted by the mutual "company" having calculated their risk including the actuarial calculations where the EQC covers the first 100k of EQ risk, having assumed that most EQ events often leave little "mop up" cover for the insurer of property and contents and now facing a completely unknown exposure.
In this unfolding disaster they have no way of assessing their exposure as most claims have gone direct to EQC and until the total is over the 100k people will not approach the company. ( I contacted my broker on Sept 6th with a heads up on my potential loss and will update that when we are inspected, so far has not happened). Hence the vagueness of what is involved for AMI. Because they have a potential exposure in CHCH that even the most prudent would not have considered reaching the level it has in their worst nightmare, it was in the minds of most (before the certainty of hindsight entered) going to be Wellington. That risk in my thinking was commercial (no EQC involvement hence easier to calculate) and not residential in the same resulting outcome that CHCH faces.
Rodger Kerr from the BRT on his daily scheduled comentary on the economy on Newstalk ZB with Hosking at around 06 45 today made a major back pedal from his very condemning comment of yesterday.
Lets face it no Bank in the world could pay all their depositors on any one day, they would be in a position of chaos while they called loans, cashed securities and raised cash. Sadly AMI is in the dark, and although having made errors in re-insurance, they are reported to have bought 30 million worth since Sept 4th, and committed to to concentrated a geographical area that flies in the face of commercial prudence they are only a mutual in a provincial town and may be without clean underwear.

PM of NZ said...

"Now fast forward to a company with which Adolf has considerable close experience."

After watching another high profile blogger dalliance/downfall with that same company last year, one wonders if Adolf played any part in that saga?

Anonymous said...

The branch of S&P that rates Australasian insurers operates out of Melbourne. I recall being told they were just an accounting firm that S&P had purchased to have representation in the region. I can't verify that, however I can confirm they are bloody useless.

Having been involved with an insurer that was rated by S&P locally, I instigated a change to AM Bests who actually asked for, and received, full company information on which to base the rating. Yes that's correct - S&P provided a rating without understanding what the insurance company did. (In their defence S&P provided the insurers parent company with a rating that they recycled to provide the insurer claims paying ability rating).

I do feel some sympathy with rating agencies globally as they do hold an insurers ongoing viability in their hands when issuing a rating. However that is not relevant here as New Zealanders only value cheap premiums. A poor rating wouldn't have changed your average kiwi's decision to insure with AMI.


Anonymous said...

Sounds familiar, I recall the testimony of the ratings agencies that gave sub-prime mortgages/CDO's the AAA ratings that underpinned the GFC.
"Of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent have now been downgraded to junk status."

Anonymous said...

Oops, should have included a line int here that the ratings agencies testified that ratings were only their opinion and they couldn't be held liable if somebody actually listened to their opinion
(or words to that effect).

Adolf Fiinkensein said...

PM of NZ you have confirmed your status of moronic idiothood.

FYI the answer to you unsubtle question is 'no.'

Adolf Fiinkensein said...

And while I'm at it,where was the Government Actuary hiding?

I understand all insurers report each year to the GA. One has to wonder for what purpose.

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