Main Ratings Bureaux for Standard and Poors - MyAssignmenthelp.com

Question: Discuss about theMain Ratings Bureauxfor Standard and Poors. Answer: The paper examines the main ratings bureaux including Moodys, Standard and Poors, Fitch and A.M. Best for insurance alongside additional quite small rating agencies. The Big Three credit ratings agencies include Standard Poors (SP), Fitch Group and Moodys. The Moodys and SP are United States based whereas the Fitch has two headquarters in London and New York City. It is under the control of Dearst. These agencies held a shared global market share of about ninety-five percent with SP and Moodys having approximately forty percent individually while Fitch has about fifteen percent. The three agencies have special status arising from cementation by law initially solely in the US. However, this cementation by law was later adopted in Europe. From the middle of the 1990s till early 2003, they were solely Nationally Recognized Statistical Rating Organizations (NRSROs) in the US. Such a designation meant the three agencies were utilized by the United States government in various regulatory areas. Additional four NRSROs and Fitch in the year 1990s (Duan Van Laere, 2012). These agencies have remained under extensive scrutiny following the 2007-2009 global financial crisis arising from their preferable pre-crisis ratings of the bankrupt financial institution including Lehman Brothers, alongside risk mortgage-linked securities which accounted for the collapse of the United States housing market. They became key enablers of the meltdown of the financial in the wake of the financial crisis (Elkhoury, 2009). The mortgage-associated securities at the core of the crisis were unable to be marketed and subsequently sold in the absence of approval of their seal. The investors had rely on these agents. Besides the Big Three agencies, there are A.M. Best and Weiss Ratings. Each rating agency has it individual rating standards, scale and vary in the firms they rate but with the substantial overlap. All of the mentioned rating agencies utilize the public info, like SEC filings, besides the main accounting reports, encompassing the cash flow, balance sheet as well as income statement. The balance is useful in rating as it indicates how much assets surpass liabilities. All of these ratings agencies with an exception of Weiss acquire extra information from the executive management alongside owners via interviews as well as questionnaires. The A.M. Best focuses mainly in credit ratings for the insurance firms and it has the widest coverage of the insurance firms, whereas the other remaining rating agencies further cover several kinds of firms as well as debt securities (Flynn Ghent, 2017). The other feature that distinguish Weiss from the remaining rating agencies is that they undertake paid ratings by the end-users, while the remaining rating agencies receive their respective payment from the firms that they rate. This establishes the potential conflict of interests since the companies shall generally pursue those rating agencies which shall provide them with the best ratings. Subsequently, the rating agencies might be increasingly inclined to provide higher ratings than would be acceptable by the financial status of the firms. Such a conflict of interest remains what partially triggered the credit crisis of the 2007-2009 since certain rating agencies like Moodys alongside Standard and Poors, were providing investment-grade ratings to financial securities anchored on the debt like mortgage-backed securities as well as collateralized debt obligations, thus, remained anchored on subprime mortgages (Rona-Tas, 2017). Apart from such conflict, nevertheless, information from management via interviews as well as questionnaires can generate substantially greater insight into the financial viability of the firms as well as its future. The accuracy of diverse IFS ratings from diverse CRAs can as well as be measured via the analysis of the statistics of the default alongside impairment rates for individual rating classification or category: The A.M. Best created in the year 1900, rates the most of insurers. It further has a not rated designation for such companies which are not covered. The IFS ratings from the diverse firms might vary in their designation of the quality of the credit. For example, an A-from A.M. Best remains the most comparable to the BBB from the Fitch, the Moodys as well as the Standard Poors. The Weiss ratings mostly rely on the public financial statement; firm executives are never interviewed nor are not publicly available documents utilized, unless they remain willingly provided by the firm (White, 2010).). Every rating scale utilizes uppercase letters for the main categories of the financial stability. Here A is the best or the foremost financially stable. Minor distinctions within individual major category is designated with the lower case letters, or the plusses as well as minuses. It is also noted that rating designations might designate diverse levels of the financial stability among diverse agencies. For example, A+ designates the penultimate top rating from the AM Best from its fifteen categories, while that same designation remains the fifth highest ratings out of the twenty categories for the Fitch as well as the nineteen categories for the SP (Eijffinger, 2012). The primary information for the ratings arise from quarterly as well as annual financial statements that insurers have to file with their state regulator, complemented with the publicly reachable documents like SEC filings, business plans as well as the AM Best questionnaires. The info is further collected from the interviews with the executive of the insurance firms. The financial strength ratings range from A++, superior, to F, in liquidation (De Haan Amtenbrink, 2011). Not all the insurance firms shall provide rating info to the rating firms, whereby, A.M. Best and SP will depend on the public info, but the shall designate the rating which is anchored on the public info solely. The A.M. Best suffixes (pd) to the rating, that it will call Public Data Rating, whereas SP shall suffix pi to its rated designation, that it will tag A Qualified Solvency Rating. In conclusion, the paper has focused on the rating agencies including their rating scales and standard to enhance the understanding of these agencies (Bolton, Freixas Shapiro, 2012). References Bolton, P., Freixas, X., Shapiro, J. (2012). The credit ratings game. The Journal of Finance, 67(1), 85-111. De Haan, J., Amtenbrink, F. (2011). Credit rating agencies. Duan, J. C., Van Laere, E. (2012). A public good approach to credit ratingsFrom concept to reality. Journal of Banking Finance, 36(12), 3239-3247. Eijffinger, S. C. (2012). Rating agencies: role and influence of their sovereign credit risk assessment in the Eurozone. JCMS: Journal of Common Market Studies, 50(6), 912-921. Elkhoury, M. (2009). Credit rating agencies and their potential impact on developing countries. UNCTD Compendium on Debt Sustainability, 165-180. Flynn, S., Ghent, A. (2017). Competition and credit ratings after the fall. Management Science. Rona-Tas, A. (2017). The Off-Label Use of Consumer Credit Ratings. Historical Social Research, 42(1), 52-76. White, L. J. (2010). Markets: The credit rating agencies. The Journal of Economic Perspectives, 24(2), 211-226.