Oldwick, N.J.-based A.M. Best Co., which last week received its new designation as a nationally recognized statistical rating organization, plans to broaden its reach within the insurance market and is considering expanding its clientele to include bond insurers.
The firm is a well-known provider of ratings on property, casualty, and life insurers and has traditionally focused on the niche insurance market. Currently it does not rate any monoline insurers.
Larry Mayewski, an analyst at A.M. Best, said the firm expects to make a decision on rating bond insurers sometime this year. He said that in light of the recent designation, it would be "too preliminary" to disclose the criteria by which the firm would make its decision. A.M. Best is "looking at it closely," he added.
Privately held A.M. Best has provided financial strength ratings and evaluations for insurance companies since it was founded in 1899. The firm was granted NRSRO status last Thursday by the Securities and Exchange Commission and joins the ranks of Standard & Poor's, Moody's Investors Services, Fitch Ratings, and Canadian firm Dominion Bond Ratings Services as the only rating agencies operating in the U.S. with the NRSRO designation.
Standard & Poor's, Moody's, and Fitch received their NRSRO designations after the NRSRO standard was launched in 1975, while Dominion picked up the designation in 2003.
Mayewski said the agency's "initial goal is to broaden within the insurance market."
The bond insurers are important constituencies and important players in the insurance industry, he said. "Clearly there is a logical extension there."
The top municipal bond insurers -- measured by volume of bonds rated in the municipal market -- include triple-A rated MBIA Insurance Corp., Ambac Assurance Corp., Financial Security Assurance, Financial Guaranty Insurance Co., and XL Capital Assurance Inc.
CDC Ixis Financial Guaranty Inc., otherwise known as CIFG, is rated AAA by Fitch, Aa2 by Moody's, and AA by Standard & Poor's. Assured Guaranty Corp. is rated AAA by Standard & Poor's and Aa1 by Moody's. Fitch does not currently rate it. Radian Asset Assurance Inc. is rated AA by Standard & Poor's and Fitch and Aa3 by Moody's. ACA Financial Guaranty Corp. is rated A by Standard & Poor's. Fitch and Moody's do not currently rate ACA.
"Standard & Poor's and Moody's are still clearly going to be the main sources of rating agency support," according to Mark Lane, equity analyst at William Blair & Co. "They are so established and have so much credibility that we don't expect A.M. Best to have an impact in the near-term."
Lane said that because A.M. Best is one of the leading providers of research and ratings for property, casualty, and life insurers, he is not surprised about its expansion plans.
Mayewski said that A.M. Best has also started looking at rating structured finance deals and securitizations that involve insurance companies. The firm is also eying opportunities in the catastrophe bond marketplace -- a young marketplace where issuers, such as insurance companies, sell bonds to raise capital that would be use to pay claims to those affected by a disaster.
Mayewski said that other logical extensions down the road include hospitals and banks because of their close relations with the insurance industry. A.M. Best already rates health insurers and HMOs.
It would look to expand its ratings of hospitals that already have affiliation with the HMO marketplace, he said, adding that "it is logical to continue that activity as an extension of what we're doing in the health insurance industry."
A.M. Best would target banks that already have ownership stakes in insurers and those that are affiliated with insurers through their banking operations. The NRSRO designation likely will be a stepping stone to "expand [A.M. Best's] activities and branch out from the insurance area. To be a player, it is important to have the designation," he said.
A.M. Best's new designation came on the day that the SEC said it would propose a rule that would provide a new clear-cut definition of NRSROs. An SEC commissioner and staff were also pondering whether it may be necessary to request Congress to give the commission legislative authority to oversee the rating agencies.
A.M. Best has been active in the insurance industry for years. In 1999 it began publishing credit ratings for corporate debt, preferred stock, and commercial paper. The firm applied in May 2002 for a designation as an NRSRO. Since its application, the SEC was involved in looking at procedures, policies, rating applications, conflict of interest, and the credibility and visibility of the firm, Mayewski said.
As of last Thursday, A.M. Best had more than 600 outstanding ratings on securities issued by 129 insurance and reinsurance entities.
