If you ever research insurance companies, you may have noticed Standard & Poor's (S&P) ratings. S&P is a highly reputable financial services company and insurance rating organization that has been in business for over 150 years. If your insurance carrier is rated highly by this company, you can take comfort in knowing that it is financially sound.
Here's what you need to know about this rating system and how it can help you assess insurance companies.
- Standard & Poor's is an agency that rates companies on their financial performance and creditworthiness.
- Standard & Poor's rates companies on many factors such as competitive position, financial structure, and corporate governance.
- It uses a letter grading system to evaluate and rate companies; insurance firms covet top ratings and work hard to achieve them.
The credit rating arm of S&P is a subsidiary of the parent organization, S&P Global (formerly known as The McGraw-Hill Companies). The company's roots reach all the way back to 1860 when a man named Henry Varnum Poor compiled a guide to help investors vet companies operating in the then-booming railroad industry. His work to provide corporate transparency made him a pioneer in the financial statistics industry.
That legacy continues today, and businesses around the world look to S&P for financial market information. In addition, the company provides independent credit ratings, investment research, statistical data, and risk evaluation.
How It Works
Standard & Poor’s ratings are used by financial investors and other market participants to measure a company’s creditworthiness and financial strength. In other words, S&P rates companies 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 insurance coverage and consider buying an insurance policy. A good credit rating from S&P could indicate that the insurance company is financially stable and will honor its obligations when you need to initiate a claim with your insurance.
When S&P evaluates an insurance company, it assesses several qualities about a company to determine its creditworthiness and financial strength. These assessments will include a look at its:
- Competitive position in the marketplace
- Industry and country-related risks
- Capital and earnings
- Risk exposure
- Funding structure
- Corporate governance
S&P is just one credit rating agency that deals with insurance companies. There are others, including AM Best, Fitch, Kroll Bond Rating Agency, and Moody's.
Standard & Poor’s Ratings
Standard & Poor’s ratings are issued 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. In addition to these grades, S&P may add plus (+) or minus (-) signs to indicate relative strength within that letter grade.
|This is the highest rating and it means the company has a strong financial performance and is able to repay all debts and pay out any policy commitments.|
|This rating is still very strong, showing the company is performing well financially.|
|The “A” rating shows a strong capacity for a company to meet its financial commitments, though it is somewhat more likely to be affected by adverse conditions.|
|A BBB company has adequate financial performance, but it may be more likely to be adversely affected by the economic downturn.|
|This grade shows a company has marginal financial security. There are positive aspects of the company, but adverse events could threaten its ability to meet commitments.|
|A “B” rating shows a company has weak financial security. Adverse events are likely to impact its ability to meet commitments.|
|A company with this rating has very weak financial condition. It depends on favorable conditions to meet its commitments.|
|A "CC" company has extremely weak financial security characteristics. It is expected to come up short on some of its commitments.|
|D/SD||A company with a "D" or "SD" rating has already defaulted on at least one of its policy commitments. If S&P believes it will honor some policies while defaulting on others, it will issue a "selective default" (SD) rating.|
What the Ratings Mean to Insurance Companies
Insurance companies know that a good S&P rating will help them win customers, so they'll work hard to get that coveted AAA rating. The work doesn't stop once an insurance company has received the rating; the ratings are regularly reassessed.
Several factors can cause an insurance company’s credit rating to be downgraded. Some of these factors are:
- An economic downturn
- Too narrow of a business focus
- Individual debt issues
- Business climate changes
- Regulatory changes
It's a good idea to check a company's rating from multiple agencies. They're likely to advertise whatever their highest rating is, and that might not tell the full story. An analyst with one company might catch something another analyst didn't.