Guide to AKG Ratings

For AKG Financial Strength Assessment - Provider Sector

 

Introduction:

For over 20 years AKG has particularly focused on the financial strength requirements of financial advisers, who when acting on behalf of their clients, need to ascertain a company's ability to deliver sustained provision.

Operational Level Assessment:

From this customer perspective, the financial strength of companies needs to be focused at an operational level (i.e. the elements and functions of an organisation which operate to specifically deliver and manage a proposition or service to the customer), specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer’s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers’ advisers must be met.

Assessment Sectors:

It is also important to understand the sector approach (comparative peer groups) that is adopted in financial strength assessment and rating process.

At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this purpose, i.e. as a component in helping customers’ advisers to select between comparable companies competing to deliver relevant products or services.

Assessment Format & Coverage:

AKG’s focus and approach has remained consistent over the years since it commenced assessment and rating support for the market. However, coverage, format and presentation has rightly evolved over this period, in line with the needs and expectations of assessment and rating users in the market. And AKG considers further changes on a continual basis.

Assessment & Rating Process

AKG’s process for assessment and rating is to use a balanced scorecard of measures and comparative information, relevant to the companies contained within each peer group. This is gathered via Public Information only for non-participatory assessments and Public Information plus company interactions with companies for participatory assessments. (Further information on the different non-participatory and participatory basis can be found here and for companies wishing to learn more about participatory assessment AKG is pleased to outline this and welcomes contact).

Assessment is predominantly comparative, but with the ability to consider absolute characteristics, where it is deemed useful from a user perspective to understand and reflect broader trends and issues of a market wide nature. For example, during a sustained financial crisis it may be appropriate that almost all companies within a sector move down the ratings spectrum, notwithstanding the fact that their relative financial strength, within that sector from a customer’s perspective, has not significantly altered. This change would therefore be to illustrate and communicate a weakening of the companies in the sector.

Key ingredient criteria and information items used within this balanced scorecard approach are shown in the Rating Definitions (below).

Tools for the comparison and of both quantitative and qualitative data and information are used within the process. There is appropriate oversight and peer review of both the information compilation and of the final assessment and rating establishment with the latter being ultimately established at an AKG rating committee level.

Sources of public information include: Report & Accounts, Solvency and Financial Condition reports for insurance companies, Pillar III discloser documents, PPFMs, press releases, websites, press reports, and product brochures.

Sources of non public information include: company presentations, management accounts and dialogue with senior management.

Rating Definitions:

Overall Financial Strength Rating

The objective is to provide a simple indication of the general financial strength of a company from the perspective of those of financial advisers who when acting on behalf of their clients need to ascertain a company's ability to deliver sustained operational provision of products or services.

The overall rating inherently reflects the mix of business within the company, since different types of customer or policyholder have different requirements and expectations, and the company may have particular strengths and weaknesses in respect of its key product or service areas. However it also takes account of comparison across the sector in which it is assessed.

The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in-force): capital and asset position, expense position and profitability any specifically onerous element such as with profits realistic balance sheet position, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic potion and rationale, brand and image, typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces.

A

Superior

B+

Very strong

B

Strong

B-

Satisfactory

C

Weak

D

Very weak

Unit Linked Financial Strength Rating

The objective is to provide a simple indication of the unit linked financial strength of a company, where it currently offers unit linked business or has existing unit linked business within it. This is from the perspective of those of financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of unit linked products or propositions. Its comparison is with other companies within the assessment sector that offer or have unit linked business.

The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic potion and rationale, brand and image, typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces.

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

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 to customers, 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).

This is from the perspective of those of financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of with profits funds, products or propositions. Its comparison is with other companies within the assessment sector that offer or have with profits business.

The main criteria taken into account are: capital and asset position, expense position and profitability, 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.

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

NOTE: More detailed analysis of with profits companies is included in AKG’s UK Life Office With Profits Reports.

Non Profit Financial Strength Rating

The objective is to provide a simple indication of the non profit financial strength of a company, where it currently offers or has existing products and propositions such as term assurance and annuities. This includes the company’s ability to meet all guaranteed payments arising from such products, but also the company’s wider ability to deliver sustained operational provision of such non profit products or propositions. Its comparison is with other companies within the assessment sector that offer or have non profit business.

The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic potion and rationale, brand and image, product / service features, its operating environment and ability to withstand external forces.

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

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.

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

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.

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

Business Performance Rating (NEW in 2017 – previously ‘Annual Review’)

This review is an assessment of how the company and the brand has fared against its peers, and how it is perceived externally. Effectively this is how it has performed recently in the market. Whilst it will include performance indicators from the most recent available statutory reporting (report and accounts and SFCRs in the case of insurance companies, for example) it will also draw on other recent key performance elements before and after such disclosure, up to the point at which the assessment is undertaken.

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.

Ratings Scale:

★★★★★

Excellent

★★★★

Very good

★★★

Good

★★

Adequate

Poor

Not rated

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