A.M. Best Special Report: Analyzing Commercial Banking Operations

Business Wire, April 7, 2005

OLDWICK, N.J. -- Globally, increasing numbers of banks and insurers have expanded operations into each other's industry, through start-up companies, acquisitions and/or merger activity.

Based on this growing trend, A.M. Best Co. has released a methodology for evaluating the financial health of the banking operations of insurance-related enterprises. Such evaluations typically are performed in the course of assigning a Best's Financial Strength Rating (FSR) to insurance entities within an organization.

A Best's FSR and Issuer Credit Rating (ICR) are assigned to an operating company based on a comprehensive quantitative and qualitative assessment of the entity's financial strength and operating characteristics. The assignment of an ICR to a holding company of an operating insurer or noninsurance entity reflects an analysis of the impact of the creditworthiness of the subsidiary on the parent's credit profile. This analysis includes consideration of the risks associated with the holding company being a discrete legal entity and reflects the subordination of the holding company's creditors to the operating company's policyholders.

The FSR/ICR of an operating entity also reflects A.M. Best's analysis of the extent to which the operating company is supporting debt or other obligations of a holding company, and vice versa. For noninsurance banking entities, A.M. Best performs a detailed internal analysis of their risk profiles and the resulting effects on the rated entities within the group.

The analytical framework outlined for assessing banking institutions highlights special issues particular to the banking industry. Unique factors include:

--Banks play a vital role in a country's macroeconomic and monetary policies as vehicles through which currency and credit flow into a nation's stream of commerce and financial system.

--Bank earnings are derived from leveraging capital. Hence, banks tend to be highly leveraged and operate with relatively low capitalization.

--Banks also have to be adept at managing liquidity, since they usually rely on confidence- or reputation-sensitive funding sources, such as deposits, capital markets and interbank borrowings, as primary funding sources.

Key bank-specific issues assessed include: the competitive and regulatory environment; management and strategy; funding and liquidity; financial and operating leverage; capital adequacy; earnings sources and stability; and risk management. Each element considered fits comfortably within the traditional A.M. Best insurer rating analysis framework of balance sheet strength, operating performance and business profile.

Taken together, these factors result in a determination as to whether the given banking activities add to, or potentially detract from, the financial strength and flexibility of the respective A.M. Best-rated companies.

For more information on A.M. Best's rating methodologies or to download a copy of this methodology report, visit http://www.ambest.com/ratings/methodology.asp.> A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.