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Flashcards in Feldblum: Rating Agencies Deck (24)
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1

List 3 agencies that produce credit ratings:

S&P, Moody's & Fitch

2

List an agency that produces Financial Strength
Ratings for life and P/C insurers:

AM Best

3

List 3 reasons why Financial Strength Ratings are
important to insurers:

1. Assess ability to pay claims
2. Reinsurers desire investment grade ratings to retain business
3. Independent agents use to place customers with higher rated insurers

4

Give two criticisms of the use of rating agencies.

-Recent downgrades of highly rated debt
-Oligopolistic nature of rating agency industry
-Greater eciency of free markets in determining bond yields

5

2 reasons that Unrated Insurers can be at disadvantage:

1. Independent agents may hesitate to use them
2. Banks require property insurance from rated insurer for mortgages

6

The Ratings Process focuses on quality of insurer's
managers and business strategy. List a few factors that
it considers:

-Knowledge of industry trends
-Experience with adverse scenarios
-Handling of current problems
-Doesn't cover underwriting or investment decisions, as both can be distorted by random fluctuations

7

5 steps of an interactive rating:

1. Background research by ratings analyst and proprietary data submitted by insurer
2. Interactive meetings between ratings analysts and senior managers of the insurer
3. Preparation of ratings proposal by lead analyst and
additional data submitted by insurer
4. Decision by the ratings committee after lead analyst presents proposal
5. Rating published

8

3 reasons that Public data insufficient for the Rating
Agency analysis:

1. investment schedules have little detail on derivatives
2. reserve schedules may not show the same segmentation that the insurer uses
3. reinsurance data doesn't show attachment points / limits

9

What type of data does the rating agency collect
during the interactive meetings:

Underwriting, reserving, investment, and operating
performance with supporting data

10

What happens if the insurer refuses an interactive
meeting:

Agency may issue a public rating using public information. Agency may issue public rating to inform others that past rating is no longer valid

11

3 reasons that an insurer with a rating from A.M. Best
may request another rating from S&P, Moody's or
Fitch:

1. May want to issue debt through a holding company and
wants rating from agency with more experience in debt
ratings
2. Public company may want rating from agency better known to investors
3. May not like current rating and believes second will be better

12

2 broad categories of requests that agencies may make
during the interactive meetings between ratings
analysts and senior managers of the insurer:

1. High level requests
2. Insurer specic based on business written

13

List some examples of high level requests that the
agencies may make during the interactive meetings:

Business strategy, risk concentration guidelines, how
information travels from management to employees

14

List some examples of the extensive background
material that the agency requests from the insurer:

-Statutory A.S. and GAAP financial statements
-History of company focusing on major events with
biographies of senior executives
-Investment strategy & guidelines
-Organizational charts
-Product descriptions and business strategy by line

15

3 reasons that the Insurer should not withhold
damaging data that is not requested:

1. Insurer loses credibility
2. Makes agency look bad to investors
3. May place insurer on ratings watch or lead to ratings
downgrades

16

Briefly explain the top-down approach used by the
Rating Agencies:

-Start with economic and industry forecasts
-Go to insurer's position within the industry

17

2 reasons that the agencies are reluctant to change
ratings too quickly:

-Erroneous downgrades anger clients
-Erroneous upgrades ruin agency's reputation

18

3 reasons most insurers are rated:

1. Agents are cautious of unrated insurers
2. Third-parties rely on outside assessments of insurer solvency
3. Rating agencies are efficient at assessing nancial strength

19

List 4 lines of business where high ratings are
important:

1. reinsurance
2. surety
3. homeowners
4. structured settlements

20

Briefly explain why high ratings are important for
Reinsurance:

-Many reinsurers are not licensed in the U.S.
-Often cover long-tailed, catastrophe, or other large claim risks
-Therefore, Primary insurers need financially strong reinsurers.
-Also, strongly capitalized reinsurers can charge higher
premiums
-Also, Reinsurance treaties may specifically link ratings and security

21

Briefly explain why high ratings are important for
Surety:

Principles may require construction firms obtain surety
contracts from A rated insurers

22

Briefly explain why high ratings are important for
Homeowners:

Banks require property insurance to issue mortgages. Due to risk of catastrophes in property, banks may require insurer has investment grade rating

23

Briefly explain why high ratings are important for
Structured Settlements:

To protect claimants, courts may require A rated insurers

24

List the A.M. Best financial strength ratings:

-Secure (Superior - A++, A+/ Excellent - A, A-/ Good -
B++, B+)
-Vulnerable (Fair - B, B-/ Marginal - C++, C+/ Weak - C,
C-/ Poor - D/ Under Supervision - E/ In Liquidation - F/
Rating Suspended - S)