You may have heard of the ratings from Standard & Poor’s (S&P) if you’ve done research on insurance companies. S&P is a financial services company and insurance rating organization. The company has been in operation for over 150 years. You can feel comforted knowing that your insurance company is rated well by S&P and is financially stable.
Company Overview
S&P’s credit rating unit is a subsidiary of its parent organization, S&P Global, which was previously known as The McGraw-Hill Companies. The roots of McGraw-Hill date back to 1860 when a man named Henry Varnum Poor compiled a guide to help investors evaluate companies in the booming railroad industry. His work in providing transparency made him a pioneer in financial statistics.
This legacy continues into 2022. Companies around the world rely on S&P for market data. The company provides credit ratings, investment research, statistical data, and risk assessments.
How the System Works
Standard & Poor’s ratings are used by investors and others to measure a company’s ability to meet its debt and financial obligations. S&P rates companies based on the likelihood of fulfilling their debts and obligations.
This information is useful not only for investors, risk managers, and lenders, but it can also assist you when comparing coverages and guiding you when considering purchasing an insurance policy. A good credit rating from S&P indicates that the insurance company is stable and will meet its obligations when you need to file a claim.
S&P measures several attributes about the company to determine its ability to meet financial obligations and its financial strength. These assessments include:
- Market position
- Industry and country risks
- Capital and earnings
- Exposure to risks
- Financial structure
- Corporate governance
- Liquidity
S&P Ratings
S&P rates companies with letter grades from “AAA” to “D.” See the table below for a brief explanation of the letter ratings and what they mean. S&P may add plus (+) or minus (-) signs to indicate strengths or weaknesses within those letter ratings.
- AAA: This is the highest rating. It means that the company has a strong performance and is able to repay all debts and fulfill any insurance obligations.
- AA: This rating is still very strong. It indicates that the company is doing well financially.
- A: The “A” rating shows a strong ability for the company to meet its financial obligations, although it is more susceptible to negative conditions.
- BBB: A company with a BBB rating has adequate financial performance but may be more exposed to economic downturns.
- BB: This rating indicates that the company has weak financial security. There are positive aspects to the company, but negative events could threaten its ability to meet obligations.
- B: The “B” rating shows that the company has weak financial security. Negative events may affect its ability to meet obligations.
- CCC: A company with this rating has a very weak financial condition. It relies on favorable conditions to meet its obligations.
- CC: A company with a “CC” rating has extremely weak financial security traits. It is likely to fail in some obligations.
- D/SD: A company rated “D” or “SD” may have defaulted on at least one of its obligations. S&P will issue an “SD” rating for selective default if they believe that the company will meet some policies while failing to meet others.
What Ratings Mean for Insurance Companies
Insurance providers know that a good rating from S&P will help them attract customers. They work hard to achieve an AAA rating. The work doesn’t stop once an insurer has a rating. They are regularly reassessed.
Several factors can lead to a downgrade of an insurance company’s credit rating. Some of these factors include economic downturns, overly narrow business focus, and individual debt issues. Changes in climate and regulatory changes can also impact business.
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Verifying a company’s rating from multiple agencies is a good practice. It will announce its highest rating. This may not tell the whole story. An analyst from one firm may notice something that another analyst did not.
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Sources:
- S&P Global. “Our History.” Accessed December 11, 2021.
- S&P Global. “How We Rate Insurers.” Accessed December 11, 2021.
- Insurance Information Institute. “How to Assess the Financial Strength of an Insurance Company.” Accessed December 11, 2021.
- S&P Global. “S&P Global Ratings Definitions.” Accessed December 11, 2021.
Source: https://www.thebalancemoney.com/standard-and-poor-s-credit-ratings-and-more-1969747
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