You may have heard of Standard & Poor's (S&P) ratings if you've ever researched insurance companies. S&P is a financial services company and insurance rating organization. It's been in business for over 150 years. You can take comfort in knowing that your insurance carrier is financially sound if it's rated highly by S&P.
Here's what you need to know about this rating system and how it can help you assess insurers.
- Standard & Poor's rates companies on their financial performance and creditworthiness.
- It ranks companies based on many factors, such as competitive position, financial structure, and corporate governance.
- It uses a letter grading system to rate companies.
The credit rating arm of S&P is a subsidiary of its parent organization, S&P Global, once known as The McGraw-Hill Companies. McGraw-Hill's roots reach all the way back to 1860 when a man named Henry Varnum Poor compiled a guide to help investors vet firms in the then-booming railroad industry. His work to provide transparency made him a pioneer in financial statistics.
That legacy continues in 2022. Businesses around the world look to S&P for market data. The company provides credit ratings, investment research, statistical data, and risk evaluation.
How It Works
Standard & Poor’s ratings are used by investors and others to measure a company’s creditworthiness and financial strength. S&P rates firms on how likely they are to honor their debts and obligations.
This information is not only helpful for investors, risk managers, and lenders. It can also help as you compare coverages. It can guide you as you think about buying a policy. A good credit rating from S&P shows that the insurer is stable and will honor its obligations when you need to make a claim.
S&P gauges many qualities about a company to determine its creditworthiness and financial strength. These assessments include:
- Its position in the market
- Industry and country-related risks
- Its capital and earnings
- Risk exposure
- Its funding structure
- Corporate governance
S&P is just one credit rating agency that deals with insurance companies. There are others, such as AM Best, Fitch, Kroll Bond Rating Agency, and Moody's.
Standard & Poor’s Ratings
Standard & Poor’s ratings are ranked in letter grades from “AAA” to “D.” Take a look at the chart below for a brief explanation of the letter ratings and what they mean. S&P may add plus (+) or minus (-) signs to imply strengths or flaws within that letter grade.
|AAA||This is the highest rating. It means that the company has a strong performance. It's able to repay all debts and pay out any policy commitments.|
|AA||This rating is still very strong. It shows that the firm is performing well financially.|
|A||The “A” rating shows a strong capacity for a company to meet its financial commitments, although it's more likely to be affected by adverse conditions.|
|BBB||A BBB company has adequate financial performance, but it may be more likely to be adversely affected by the economic downturn.|
|BB||This grade shows that a company has marginal financial security. There are positive aspects of the company, but adverse events could threaten its ability to meet commitments.|
|B||A “B” rating shows a company has weak financial security. Adverse events may impact its ability to meet commitments.|
|CCC||A company with this rating has very weak financial condition. It depends on good conditions to meet its commitments.|
|CC||A "CC" company has very weak financial security characteristics. It's likely to come up short on some of its commitments.|
|D/SD||A company with a "D" or "SD" rating has defaulted on at least one of its policy commitments. S&P will issue a "selective default" (SD) rating if it thinks the firm will honor some policies while defaulting on others.|
What the Ratings Mean to Insurers
Insurers know that a good S&P rating will help them win customers. They work hard to get that AAA rating. And the work doesn't stop after an insurer has received the rating. They're regularly reassessed.
Many factors can cause an insurer’s credit rating to be downgraded. Some of these factors include economic downturns, too narrow of a business focus, and individual debt issues. Business climate changes and regulatory changes can also have an effect.
It's a good idea to check a company's rating from more than one agency. It will advertise its highest rating. This might not tell the full story. An analyst with one company might catch something that another analyst didn't.
S&P Global. "Our History." Accessed Dec. 11, 2021.
S&P Global. "How We Rate Insurers." Accessed Dec. 11, 2021.
Insurance Information Institute. "How to Assess the Financial Strength of an Insurance Company." Accessed Dec. 11, 2021.
S&P Global. "S&P Global Ratings Definitions." Accessed Dec. 11, 2021.