Guide to AKG Ratings

For AKG Company Profile & Financial Strength Reports

 

Background

AKG’s origins are important. As an organisation AKG comes from the perspective of providing financial strength ratings and assessment together with support for the UK intermediary sector in the context of required information on life companies, and other entities which that sector advises on. Essentially specifically designed to meet the the needs of those selecting product providers for the delivery of products / propositions to meet the need of advised clients and their requirement for the assessment of financial strength to fit with this activity.

This focus, together with its use of a professional skill set blended with market/ distribution knowledge, has created a unique expertise, as distinct from the global ratings agencies or those providing credit ratings. Particularly where those agencies may be primarily coming from the perspective of meeting the requirements of a different audience, notably debt / equity investors.

Thus whilst many ingredients of AKG’s ratings activity and that of other ratings organisations will necessarily be common, AKG notably comes from this different starting points in having a sole focus on the selection needs of end clients of providers and their advisers and has constructed its offering specifically from this perspective.

This is further manifest in the key definition AKG places on financial strength (for both ratings and assessment). Namely, that the objective is to go beyond purely a consideration of solvency (albeit this will always be an important part of the mix) and consider in what format an organisation may be able to survive to meet the fair expectations of customers and their advisers. Expectations, which must include the experience encountered by these two groups, will therefore include ongoing operational abilities and performance.

This is often summarised as three key underlying questions relevant to an intermediary and their clients:

Financial Strength Ratings - Introduction

The aim of AKG’s financial strength ratings is to assist advisers and others to assess the relative strengths of individual provider companies. AKG’s concept of ‘financial strength’ starts with the fundamental issue of a company’s ability to meet all of its guaranteed payments to policyholders, but extends beyond this by aiming to factor in the degree to which a policyholder’s expectations are likely to be met - or even exceeded - in the long-term. For performance-related products, where the eventual return generally depends largely upon a company’s success in consistently delivering superior investment performance, and in containing expense charges, a company’s ability to meet expectations is likely to be heavily dependent upon whether or not it is able to sustain its operations in the relevant market, and whether or not it can maintain, or improve, its competitive position.

As a result, AKG believes that, ideally, the evaluation of ‘financial strength’ should depend upon the type of product under consideration. A particular company may be judged as very strong in the context of one particular product line, but it may be weaker in another context. An illustration of this concept is a company that currently only markets unit linked business, but which has a very small closed block of with profits business, written many years ago. Such a company may be judged as ‘good’ for unit linked business, whilst considered ‘poor’ in respect of with profits business.

AKG has consistently promoted and developed the concept of providing financial strength ratings separately for each of the three major product categories - With Profits, Non Profit and Unit Linked, and these are included in Full report assessments.

All AKG’s financial strength ratings should be used with care, since even the more detailed approach described above represents something of a simplification. To illustrate this point, for example, the 'Non Profit' category covers a multiplicity of different products. It is clear that slightly different criteria should be used for, say, short-term policies with fully guaranteed terms (e.g. Guaranteed Bonds), than for longer-term policies with terms that can be varied at the company's discretion (e.g. Renewable or Reviewable Term).

AKG assesses financial strength using consistent methodology and objective measures wherever possible, and based on the detailed analysis of the company’s particular strengths and weaknesses. The objectives and criteria for each of the financial strength ratings are summarised below.

Overall Financial Strength Rating

The objective is to provide a simple broad-brush indication of the general financial strength of a company. In addition to an assessment of the company’s ability to meet all of its guaranteed payments to policyholders, AKG also aims to factor in the degree to which policyholders’ expectations are likely to be met - or even exceeded - in the long-term. This involves an assessment of a company’s ability to survive in its current form for the long term. The overall rating inherently reflects the mix of business in-force within the company, since different types of policyholder have different expectations, and the company’s particular strengths and weaknesses in respect of its key product areas.

The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in-force): capital base and free asset position, with profits realistic balance sheet position, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), typical fund performance achievements, and image and strategy.

A

Superior

B+

Very strong

B

Strong

B-

Satisfactory

C

Weak

D

Very weak

Product-Specific Financial Strength Ratings

In addition to an Overall Financial Strength Rating, each company featured in a FULL report is also assessed (where relevant) in respect of a With Profits Financial Strength Rating, a Non Profit Financial Strength Rating and a Unit Linked Financial Strength Rating.

Each of these product-specific ratings is assessed using the following scale:

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

AKG's objectives and criteria for each of these ratings are summarised below:

With Profits Financial Strength Rating

The objective is to assess the overall strength of the company’s with profits funds. The initial concern is the company's ability to meet its ongoing guaranteed, or promised, commitments, i.e. existing sum assured and bonuses. However, the company's ability to continue to compete successfully in the with profits market is also particularly relevant, given that closed funds are sometimes bad news for policyholders. In such situations, overall expenses tend to increase as a proportion of the fund and investment performance may well deteriorate. These, together with other factors, may make it difficult for companies in such situations to maintain competitive bonus rates at future declarations, although existing declared bonuses are not affected (other than possibly by MVRs).

The main criteria taken into account are: capital base and free asset position, with profits realistic balance sheet position, the amount of with profits business in-force, parental strength (and likely attitude towards supporting the company), and image and strategy. Where the company's with profits business is largely reinsured to another company, its strength and the nature of the relationship between the companies are also taken into account.

Non Profit Financial Strength Rating

The objective is to assess the company's ability to meet all guaranteed payments arising from such contracts as term plans, annuities etc.

The main criteria taken into account are: free assets, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), and image and strategy.

Unit Linked Financial Strength Rating

Whilst this is essentially a non profit line, and the primary objective is to assess the company's ability to meet all guaranteed payments arising, AKG also seeks to take into account the extent to which the company is likely to be able to sustain its unit linked operations, and whether or not it is likely to be able to maintain, or improve, its competitive position. Thus strategic issues are also relevant, because of their bearing on the quality of investment management offered, and because of companies' rights to increase charges etc.

The main criteria taken into account are: free assets, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), typical fund performance achievements, and image and strategy.

Supporting Ratings

Introduction

Supporting ratings, assessed at the brand level, are provided only in FULL reports. AKG assesses three key supporting areas, using consistent methodology and objective measures wherever possible. The aim is to assist IFAs and others to consider the relative merits of the brands that they deal with.

Each supporting rating is assessed using the following scale:

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

AKG's objectives and criteria for each of these ratings are summarised below:

Service Rating

The objective is to assess the quality of the organisation's service to the intermediary market in respect of the brand concerned.

Criteria taken into account include: performance in surveys, awards and benchmarking exercises (external and internal), the organisation's philosophy, service charters, the extent of investments designed to improve service, and feedback from intermediaries.

Image and Strategy Rating

The objective is to assess the effectiveness of the means by which the organisation currently positions itself to distribute its products for the brand concerned and the plans it has to maintain and/or develop its position.

Criteria taken into account include: overall trends in the company’s market share position, brand visibility and reputation, feedback from intermediaries and industry commentators, and AKG’s view of the company's general strategy.

Annual Review Rating

This is an end of year view for the last year for which Report and Accounts, regulatory returns, etc., are available, together with comment on any significant post-balance sheet events. It is an assessment of how the brand has fared against its peers, and how it is perceived externally.

Criteria taken into account include: increase/decrease in market shares, expense containment, publicity - good or bad, press or market commentary, regulatory fines, and competitive position.

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