The latest up-date of Standard & Poor’s ratings of the 23 largest reinsurance group reveals the importance of enterprise risk management in bolstering ratings that might otherwise be unacceptable, as seen with Catlin and Lancashire.
The agency rates reinsurers based on a ratings anchor combining “Business Risk Profile” and “Financial Risk Profile” assessments. The financial strength rating anchor for both Catlin and Lancashire is bbb+, below what S&P says is “perceived as a key threshold of market acceptance.” However, ERM analysis, acting as a modifier to the initial rating anchor, was able to push the indicative rating up one notch to A-.
In Catlin’s case a further notch uplift to ‘A’ was achieved through S&P’s ‘holistic’ analysis whereby the agency may add or subtract a rating notch based on a final view of particularly strong or weak credit factors not already sufficiently captured by its analysis. For Catlin this reflected in particular S&P’s view of the strength of its competitive position and the relative quality of its earnings versus its peer group.
Stuart Shipperlee, Analytical Partner at Litmus, said: “for both organisations the ERM score is clearly a powerful affirmation of management quality, however I would presume they would be more comfortable being able to achieve the ‘A-‘ rating level via the Business Risk and Financial Risk profiles that drive the initial rating anchor. Not least given that what constitutes high quality ERM is a bar that is permanently being raised. For Lancashire achieving an ‘a-‘ rating anchor might be difficult to achieve though as the key drivers of this are heavily influenced by its high risk lines business model.”
Partner Re, in contrast to Catlin and Lancashire, was given an ‘aa-‘ rating which was then reduced to ‘A+’.
Shipperlee explained: “for Partner Re the fundamental components of its rating anchor are almost as strong as they can be for a reinsurer. Only risks intrinsic to the reinsurance industry and a scale below the very largest global reinsurers drag this down from the highest possible ‘anchor’ level of ‘aa+’. However I’m sure that, given their size and sophistication, they will be disappointed with S&P assessments of the key qualitative factors of Management & Governance being assessed as only ‘fair’ whilst ERM is assessed as being ‘adequate with strong risk controls”.
S&P, reinsurance, rating, Lancashire, Partner Re, Catlin, ERM