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It will be appreciated that the ratings are designed to reference a broad standard or benchmark, and
identically rated companies might not be of the same quality. Rating agencies thus offer a broad
perspective in their evaluations due to the large number and diversity of the companies involved.

E3A Outlook
Some ratings will also contain an outlook. This is where companies have distinctive business trends. A
rating outlook gives the rating agency’s view about the potential future direction of a company’s rating,
usually over the next twelve, 24 or 36 months. Typically, outlooks can be positive, stable or negative.

Example 9.5
In 2012, rating agency A.M. Best affirmed the financial strength rating of ‘A’ (Excellent) of AXIS Specialty with a
positive outlook reflecting its excellent risk-adjusted capitalisation, consistently strong operating performance
through varied market conditions and robust enterprise risk management controls and the view that, given the
current soft casualty market conditions, it is well positioned with a diversified book of business and an expanding
worldwide infrastructure.

In this way, a positive outlook would indicate favourable business trends, which, ultimately, could lead
to a rating upgrade in the future. These ratings, although not in any way a guarantee, or warranty, of a
company’s current or future ability to meet its obligations, are nevertheless important in terms of
whether or not a reinsured should use a particular reinsurer and how much exposure the reinsured
should allow the reinsurer to accept.

It must be stressed that a reinsured is not under any obligation to accept or rely on security ratings
provided by a rating agency. There may be occasions when a legitimate business reason exists for the
reinsured apparently to ignore such information and continue to place business with an ostensibly
underperforming reinsurer.

Useful websites
www.standardandpoors.com
www.ambest.com Reference copy for CII Face to Face Training
www.fitchratings.com

E4 Sources of information

In determining a financial strength rating, rating agencies are not only given access to published
Rating agencies are
given access to any material, such as the annual report and accounts and returns to regulatory authorities, but also to any
information required other information the agency might require to make the assessment. Examples of such material might
to make an
assessment include:
• strategic and operational plans;
• more detailed breakdown of financial information; and
• information about clients, sources of business and its production.

Rating agencies will usually request the completion of questionnaires. Additionally, they will hold
meetings with the company’s senior management. The meetings might also involve management teams
for individual business units, so that the agencies can discuss and question many areas of the
company’s management on strategy, business results and the way in which market circumstances and
9 operating situations are being addressed. Typically, they will also base their ratings on information
Chapter obtained from any other sources it considers reliable.

Ratings are thus a combination of a quantitative, objective analysis of financial information plus a
qualitative, subjective analysis relating to the quality and depth of the management, and whether or not
its decisions are coherent, credible and operable.
Ratings look to the future as well as the past record and current status of the company. Other users of
rating agency services are aware that the agencies have privileged access to information about a
company, so this adds to the credibility of their evaluations.