Learning to Love Your Ratings Analyst
International Editor
After the brouhaha between Standard & Poors and Munich Re in August over the reinsurers downgrade to "A-plus" from "double-A-minus," perhaps its necessary to reflect on the value of the ratings analyst and the difficult job they must perform.
Christopher Hitchings, European insurance analyst for Commerzbank Securities in London, gave some pointers in how to develop good relationships with ratings agencies during a recent speech at the Baden-Baden Reinsurance Symposium.
In a section of his speech titled whimsically "Learning to love the rating agency analyst," Mr. Hitchings said: "The main message is work with rating agencies and dont panic," noting that investors hate management panic.
"If you can show that you run your business sensibly, you have little to fear from the main rating agencies," he continued.
Those companies that do get downgraded need to accept that "a mirror has been held up to them," rather than getting into a public war of words, he said.
(He was making a reference to the recent Munich Re downgrade, which Munich Re protested during a press conference. The company now is raising capital in line with S&P recommendations.)
Companies should support what the agencies are doing, he said, because they provide an invaluable impartial viewpoint.
Mr. Hitchings noted that default is actually very difficult to predict, in a reference to some of the rating agencies that have gotten their ratings wrong–bringing ratings down, just as the company is heading for insolvency.
"If I said to you in the summer of 2001 that over the next two years you would see the most mind boggling aviation and property catastrophe you could ever imagine, plus a calamitous collapse in German equities, which share would you have shortened at that time, Hannover Re, Munich Re or Swiss Re?"
Contrary to perceptions, he said, the best performer over that period was Hannover Re. "Its very difficult to predict."
Most default is caused by members of management being stupid, which is difficult for a ratings agency to pin down, Mr. Hitchings said.
And, he added, its not easy being a ratings analyst, noting that such an analyst may earn $60,000 per year and has to sit down in front of a fat-cat chief executive of a reinsurance company who has Leer jets and limousines at his disposal and an income that would "make an African potentate look poor."
"Then you have to sit and tell him you think hes being stupid. He gets angry," and even angrier "if he knows youre right," Mr. Hitchings said.
Inevitably, as the ultimate defense, the rating agency will retreat into the rating models, Mr. Hitchings said.
There are some problems facing the rating agency analyst, he said, such as the risk of becoming too close to the company.
"Of course you dont want to downgrade [companies]. Its much nicer to confirm ratings or upgrade companies," he said.
He said he was appalled to discover that a leading rating agency analyst failed to look at the financial statements filed with the U.K. regulator of the Independent (a U.K. insurer now in run-off).
The rating agency simply had relied on information supplied by the company, he said, noting that publicly available information can supply enough information to predict serious problems ahead for a company, he said.
A rating agency has got to find reliable measures of management competence and a reasonable capital charge for equity investments, he said.
(See related article for more comments from Mr. Hitchings.)
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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