Turn a positive outlook into an upgrade
Many reinsurers underestimate the
obstacles that need to be overcome
when it comes to turning a positive outlook
from a rating agency into an upgrade. But it is
achievable if the rating agency’s methodology
and requirements are better understood.
That is the view of Karin Clemens,
senior consultant at Litmus Analysis,
speaking to Monte Carlo Today.
“Achieving a rating upgrade once the
outlook has been changed to positive is often
regarded as little more than a formality.
However, what could be taken for granted
may turn out to be a long process or might
never materialise,” Clemens said.
She stressed that a change to ‘positive’ is
good news, but it should not be understood
to be a guarantee for a subsequent upgrade.
According to S&P, a negative or positive
outlook implies at least a one-in-three
chance of a change to the rating in the next
two years if it is investment-grade.
An outlook change means that an agency’s assessment of how future
circumstances may evolve has altered, but that there is not yet enough
certainty to warrant a change in the rating.
To achieve the goal of an upgrade in the most effective way, Clemens
recommends seeing things from the agency’s perspective and managing
“We believe it is important to be aware that, by nature, rating
agencies will look at a company differently from management or other
stakeholders, such as equity investors. However, when engaging with the
agency it is important to address their perspective and to present the
information in a format that suits their needs,” she said.
“Critical to this is to understand what their expectations are. Over
the years, rating agencies have become more transparent and disclose
in their outlook statement the scenarios under which they could see a
rating change. Time is therefore well invested in getting underneath the
terminology of the outlook in order to fully comprehend the qualitative
and quantitative targets the agency expects to be met for an upgrade.”
Clemens said that through that exercise a reinsurer will sometimes
discover that the rating agency’s targets may diverge from its own.
“For example, if you pursue a growth strategy, involving writing
business in new markets, a rating committee’s focus will likely be on the
risks such a strategy may add, rather than the opportunities that may
come with it,” she said.
“The key focus of your discussions with the analysts should therefore
not only be why and how you grow but in particular what makes you
profitable. Indeed, addressing the ‘what and why’ of how your specific
characteristics will drive the sustainability of future performance/capital
is always key to your rating.”
Having a clear message on how your enterprise risk management
constantly evolves in line with your strategy is also vital.
“A demonstration of your ability
to effectively control and integrate risk
management in your decision-making will
be essential in making analysts comfortable
with your strategy,” she said.
Clemens added that given that a rating
is a prospective view of an insurer’s financial
strength, it will be equally important to support
the strategy with a credible forecast of earnings,
ideally including the key ratios agencies use.
“Another key factor is communicating
a forward-looking view of your capital
adequacy against the backdrop of your
strategy,” she said.
“The committee will not look at a rating
in isolation, but will compare your company
with your peers. Benchmarking with
competitors already rated at your current
and target level can be a powerful tool in
influencing the rating agency.” n
Putting the little
…so you can see
the big picture.
Software as a Service
• Data Vera for Binding Authority
• Data Vera for Exposure Management
• Pivot Point for Reinsurance Management
Business Process Outsourcing
• Process Bordereau Files
• Prepare SoVs for CAT Modeling
• Back-office support and processing services
United States • United Kingdom • India
www.intelligentinsurer.com | www.bermudareinsurancemagazine.com DAY 3: Tuesday September 12 2017 | MONTE CARLO TODAY | 25