Feldblum: Rating Agencies Flashcards
Ratings downgrade effects
May lower bond’s value
Debt held by bank may be recalled
Financial strength rating importance
Assess ability to pay claims
Reinsurance companies care
Independent agents
DOI requirements
Questions for rating agencies
Recent downgrades of highly rated debt Now required by law disclosure of rating methods Oligopolistic nature (few agencies) Greater efficiency of free markets in determining bond yields
Rated insurers
Rated for claims-paying ability
Meet requirements of agents, banks, consumers, courts
Public ratings
Insurer has less control / more chance of errors
Ratings process focus
Quality of insurer’s managers and business strategy; integrity of insurers; does not cover UW or investment decisions (subject to random fluctuations)
Benefits (to policyholders) from rating agencies
Policyholders depend on strength to get claims paid
Additional insight into company (management)
Influence capital structure
Wait and verify information (vs. bond/stock markets)
Interactive rating steps
- Background research
- Interactive meetings w/senior management
- Preparation of ratings proposal / additional data submitted
- Decision by committee
- Publication
Background research steps (Interactive rating)
Uses public data (Annual Statements, GAAP reports)
Analysis not shared with insurer; more of a check on insurer’s submission
Use of public data in interactive rating
Lack of detail (derivatives, segmentation of lines, reinsurance data lacks attachment points / limits)
Interactive meetings steps (rating agencies)
Request for certain information from management
Extensive background material
Assess insurer knowledge and integrity
Preparation of ratings (rating agencies)
Lead analyst proposes rating, ratings committee makes final decision
Decision by ratings committee
Committee made up of mix of members of agency; relies on hard data to support data – analyst is insurer’s advocate
Publications of rating
Committee decides by majority vote; reluctant to change ratings too quickly; appealed only if insurer believes there to be a material error
Three reasons insurers get rated
Agents are cautious of unrateds
Reliance on outside assessments of insurer solvency
Rating agencies are efficient with assessments
