Thursday, September 4, 2014

Rating Agency Outlook Performance

My understanding of a rating agencies outlook is that it is a generalized prediction about more specific predictions to be made sometime over ~2 years.  A rating is itself a prediction about a company's credit worthiness- will they or will they not pay someone.

Interestingly then, what you have with outlooks are predictions about future predictions.

How do outlooks perform?

(unless otherwise noted, a year's outlook was published the previous September.  So, the 2013 outlook was published in September 2012)

2013 Outlook

Fitch: Stable outlook over the next 12-24 months
Moody's: Stable outlook over the next 12-18 months

2014 Outlook

Fitch: Stable over the next 12-24 months; moved to NEgative outlook in January 2014
Moody's: Stable for next 12-18 months

2015 Outlook
Fitch: Negative over next 12-24 months
Moody's: In June- Negative outlook over the next 12-18 months; Can't find September report

It looks like outlook predictions don't perform all that well.  Consider Fitch's:

  1. In September 2012, they guessed stable over 12-24 months.  
  2. Twelve month's later they guessed stable again.  
  3. Three months later this became negative. 
  4. Nine months later (ie. this month) they guess negative for the next two years.  

This means that the original outlook was only good out to 15 months.  The second outlook did not hold true very long at all.  We will have to wait to see how the negative outlook of January and September 2014 will perform.

In their 2014 outlook, Fitch argued that would could trigger a downgrade in their outlook is, "Catastrophic Loss with Interest Spike,"
A sizeable catastrophic loss in conjunction with significant unrealised investment losses from an abrupt jump in interest rates is viewed as the greatest threat to the sector’s stable outlook at this time.  
I don't monitor interest rates but a sizeable catastrophic loss has not occurred (2013, 2014).  So something other than a 'catastrophic loss with interest spike' encouraged a downgrade.

This means that not only are the outlooks not so great but the reasoning behind them may not be so wholly transparent.

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