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Take the tea-bag test

Dear friend,

Here’s a bit of educational fun — a little English Test for you

Read the following passage, inwardly digest and then decide whether it comes from a ratings upgrade or a ratings downgrade.

(Quiet at the back, and no cheating) – you have two minutes:

The ratings on XXXX reflect its established competitive position, seasoned management team, very strong capitalization, track record of resilience to major loss events, and historically strong operating performance in absolute terms.

….XXXX's strong overall competitive position stems from its underwriting expertise, particularly within the property catastrophe arena, and the relative longevity of the relationships it enjoys both with its clients and intermediaries.

….The company has enjoyed a stable senior management team since inception

XYZ agency believes the broad experience of the company's management and underwriting staff are a positive ratings factor

XXXX's capital adequacy ratio, based on XYZ agency's risk-adjusted model, was extremely strong for the financial year ended Dec. 31, 2006

Capital was bolstered by the very strong earnings reported by the group during the year. Quality of capital is high, with minimal reliance placed on the so-called soft components of capital. The overall assessment of capitalization also benefits from the minimal tail risk attributable to the group's loss reserves

Easy wasn’t it? Except that these comments come from a downgrade, not an upgrade!

Of course I have cheated a good deal with a bit of sneaky editing, but it does seem a rather astonishing use of language. “Damning with faint praise” is an expression that springs immediately to mind.

No prizes for guessing here that the quotes I have used come from today’s downgrade of IPCRe by S&P, a move that leaves the veteran property cat player languishing on the unloved A- shelf.

But having read all the above it just doesn’t seem fair, does it?

I know S&P don’t rate start-ups, but presumably if one day they did decide to follow AM Best down this road, the A- rating would be the one it would award the fresh-faced newbies with the serviced offices and the big cash deposit in the Bank of Bermuda.

Why should a company that has succeeded for so long and is so well run and so well capitalised that has an improving capital position share a notional rating with a company with no track record and no customers?

After Dennis Emily Katrina Ophelia and others had done their stuff in 2005 and IPCRe peers Montpelier Re and PXRE had posted some massive loss numbers, I remember scanning through an issue of the magazine and my eyes rested on an IPCRe advert.

The ad was a picture of a tea-bag with the slogan “You don’t know how strong it is until you put it in hot water”. I though to myself “We’ll soon see, won’t we, IPC?”

Well, the industry got a right old scalding in 2005 and IPCRe came through with flying colours.

The firm made such a strong cup of Rosie Lee, you could stand a spoon up in the stuff!

I thought there was a move in the ratings community to put more emphasis on less tangible company bits and pieces, like management, ERM, client base and competitive position. And Fitch wrote a great paper a while back on why diversifying for the sake of it shouldn’t necessarily be given automatic credit.

The ratings community really is sometimes its own worst enemy. Much more work is needed to explain the rationale here — and the timing is weird too, don't you think?

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