S&P revision of insurer ratings met with criticism

When rating agencies tweak the way they determine insurer creditworthiness, it’s usually a tedious affair swamped with technical minutiae.

Recent efforts by S&P Global Ratings have managed to anger insurance companies, government insurance regulators and rival rating agencies. It has also achieved the seemingly impossible: a bipartisan protest against its actions on Capitol Hill.

S&P’s changes announced in December are far-reaching, but most of the criticism focuses on how the company will rate life insurers’ investment portfolios. S&P would downgrade or downgrade the ratings of securities that the company has not rated itself. This analysis feeds into the assessment of the overall soundness of a beam.

Firms like S&P are paid to rate bonds. The harshest critics claim that S&P is trying to gain market share under the guise of improving its model.

S&P says that’s not the case. The aim is to “improve our ability to differentiate between risks,” said a spokesman. The last revision was 12 years ago, and the changes would make the model more consistent with its global methodology for rating insurers.

Responses were received during S&P’s comment period, which was extended by two months to April 29 to allow for more feedback.

How S&P assesses risk in the insurance industry is no small matter. It’s one of the big companies that issues “financial strength ratings” that agents and brokers rely on to determine which airlines to recommend to their customers. Credit ratings, meanwhile, determine the cost of borrowing for companies.

Other firms such as AM Best Co., Fitch Ratings and Moody’s Investors Service play the same role. One risk for S&P if the proposed changes go through is that it could lose some business, critics said. The rivals declined to comment.

S&P’s efforts are gaining momentum as they are expected to hit some of the investments insurers have been using to boost yields in a low interest rate environment. These include privately issued securities, collateralized loan obligations and asset-backed bonds.

S&P remains the most dominant rating firm overall in terms of overall ratings posted, but some smaller peers have gained significant market share in the asset-backed securities category since 2011, according to a January Securities and Exchange report on the Rating Firms Commission. Firms have made strides in sectors such as auto loans, aircraft and solar-backed securities, data show.

Much of the industry’s propensity for non-traditional investing has been fueled by private equity firms that have bought or taken over large stakes in life insurers in recent years. Concerns from government regulators about the quality of ratings surfaced last year, and since January, the standard-setting National Association of Insurance Commissioners has required insurers to submit details of credit ratings for privately issued securities.

In short, S&P proposes lowering and sometimes scrapping other companies’ credit ratings and treating some securities as junk even if a competitor has rated them investment grade. In general, S&P would treat Moody’s and Fitch-rated securities more favorably because it has more data on their ratings than DBRS Morningstar, Egan-Jones Ratings Co., and Kroll Bond Rating Agency LLC.

In an April 14 letter, 26 Democrats and Republicans in Congress asked the SEC to review S&P’s move. “Many concerned stakeholders have raised concerns that this treatment of investments may be anticompetitive, and we share those concerns,” the group wrote to SEC Chairman Gary Gensler. The legislator called on Mr. Gensler to ensure “free and fair competition”.

Some insurers complain that S&P has not provided data to justify the proposed changes. “Our overriding concern is that we believe wealth fees need to reflect data-driven analysis,” Mariana Gomez-Vock, vice president of lobbying group American Council of Life Insurers, said in an interview.

“The S&P rating penalty for non-S&P ratings is a poorly thought out solution to a valid concern,” said Aaron Sarfatti, chief risk and strategy officer at life insurer Equitable Holdings Inc.

Write to Leslie Scism at

Corrections & Enhancements
S&P Global Ratings is pursuing an overhaul of its rating methodology for insurers. In a previous version of this article, the entity was incorrectly referred to as S&P Global Markets. (Corrected on April 21)

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