What Do S&P Insurance Ratings Mean for Investors and Policyholders?

Insurance companies rely on financial strength ratings to demonstrate their ability to meet policyholder claims and debt obligations. For investors and policyholders, these ratings are a key indicator of an insurer’s stability and reliability. Standard & Poor’s (S&P) is one of the most recognized agencies providing these assessments, offering insight into an insurer’s creditworthiness.

Understanding these ratings helps investors and policyholders make informed decisions about where to place their money or purchase coverage.

S&P Rating Scale

S&P assigns ratings based on an insurer’s ability to meet financial commitments. These ratings range from the highest level of confidence in financial strength to those indicating a heightened risk of default.

AAA

The highest rating, AAA, signifies an insurer with an extremely strong ability to meet financial obligations. These companies have diversified revenue streams, substantial capital reserves, and a history of stability. Their conservative investment strategies help them withstand economic downturns with minimal risk.

AAA-rated insurers benefit from lower borrowing costs, allowing them to offer competitive pricing and maintain profitability. These companies are typically large, well-established, and operate across multiple markets. Only a small percentage of insurers achieve this rating due to stringent financial requirements.

AA to A

Insurers rated AA and A are considered very strong to strong in financial security. While slightly less stable than AAA-rated firms, they still demonstrate reliability and substantial capital reserves.

AA-rated insurers have a very low likelihood of financial distress and can meet obligations under most economic conditions. A-rated insurers remain financially strong but may be more vulnerable during severe downturns.

Policyholders choosing AA or A-rated companies can feel confident in their insurer’s ability to pay claims. Investors view these insurers as stable but may scrutinize their earnings growth more closely.

BBB to B

Insurers rated between BBB and B have adequate to weak financial security. A BBB rating indicates sufficient capacity to meet obligations but with increased vulnerability to economic downturns. This is the lowest tier of “investment grade,” meaning it is still considered relatively safe but carries more risk than higher-rated insurers.

BB and B-rated insurers fall into the speculative category, meaning they are more likely to experience financial instability. These companies may struggle in adverse market conditions, leading to higher premiums, reduced coverage options, or regulatory intervention.

For investors, BBB-rated insurers may still be attractive if they show strong growth potential or undervalued stock prices. However, BB and B-rated firms require closer scrutiny due to their higher risk.

Below B

Insurers rated B- or lower are considered highly vulnerable to financial distress. A CCC rating suggests an insurer depends on favorable economic conditions to meet obligations, while CC or C ratings indicate a heightened risk of default.

A D rating means the insurer has failed to meet financial obligations or is undergoing restructuring. Policyholders with these insurers face significant risk, as claims payments may be delayed or reduced. Regulatory agencies may intervene, potentially leading to policy transfers or liquidation.

Investors generally avoid insurers in this category unless they specialize in distressed assets. The likelihood of recovery is low, and any investment carries substantial downside.

Criteria for Assigning Ratings

S&P evaluates insurers based on financial and operational factors to determine their ability to meet obligations.

Capital Adequacy

Capital adequacy measures an insurer’s ability to absorb financial losses and continue operations under adverse conditions. S&P examines an insurer’s risk-adjusted capital (RAC) ratio, which compares available capital to the risks associated with its assets and liabilities. A higher RAC ratio indicates a stronger financial position.

Regulatory requirements also play a role. In the U.S., insurers must comply with risk-based capital (RBC) standards set by the National Association of Insurance Commissioners (NAIC). If an insurer’s RBC ratio falls below a certain threshold, regulators may intervene.

Investment portfolios impact capital adequacy as well. Insurers with conservative asset allocations—such as high-quality bonds and diversified equities—tend to have more stable capital reserves. Those with high exposure to volatile assets face greater financial uncertainty.

Risk Management

Risk management evaluates how well an insurer identifies and mitigates financial and operational risks. S&P examines an insurer’s enterprise risk management (ERM) framework, including policies for underwriting, investment strategy, and catastrophe risk exposure. A strong ERM program helps insurers anticipate potential losses and minimize disruptions.

Underwriting discipline is a key factor. Insurers that consistently price policies based on actuarial data and historical claims experience are less likely to suffer unexpected losses. S&P reviews an insurer’s loss ratio—the percentage of premiums paid out in claims—to assess underwriting effectiveness.

Reinsurance strategies also play a role. Insurers transfer portions of their risk to reinsurers to protect against large claims, such as those from natural disasters. S&P evaluates the quality of an insurer’s reinsurance partners and the extent to which reinsurance agreements reduce financial volatility.

Profitability

Profitability reflects an insurer’s ability to generate earnings and sustain operations. S&P analyzes key financial metrics, including return on equity (ROE), underwriting profit, and net income trends. A consistently strong ROE—typically above 10%—suggests an insurer effectively manages its capital and generates sufficient returns.

The combined ratio, calculated as the sum of an insurer’s loss ratio and expense ratio, indicates whether an insurer is operating at a profit. A combined ratio below 100% means the company earns more in premiums than it pays out in claims and expenses, while a ratio above 100% suggests underwriting losses.

Investment income also contributes to profitability. Insurers generate returns from their investment portfolios, which can offset underwriting losses. S&P evaluates the composition of an insurer’s investment holdings, looking for a balance between risk and return.

Reviews and Changes in Ratings

S&P continuously evaluates insurers to ensure their ratings reflect current financial and operational conditions. Reviews can be triggered by economic shifts, regulatory changes, or company-specific events such as mergers, acquisitions, or unexpected losses.

A downgrade can occur if an insurer experiences declining profitability, rising liabilities, or a weakened ability to generate cash flow. For example, if an insurer faces a surge in claims due to a natural disaster while struggling with investment losses, S&P may lower its rating. Downgrades can lead to higher borrowing costs and reduced investor confidence.

Upgrades typically result from improved financial performance, stronger earnings, or reduced exposure to risk. If an insurer successfully implements cost-cutting measures, expands into profitable markets, or strengthens its balance sheet, S&P may raise its rating. A higher rating can enhance an insurer’s reputation and improve access to lower-cost financing.

S&P also places insurers on a CreditWatch list when there is uncertainty about their financial outlook. This designation signals that a rating change may be imminent. For instance, if an insurer is acquiring another company, S&P may place it on CreditWatch to assess how the acquisition impacts its financial position. A positive CreditWatch listing suggests a potential upgrade, while a negative listing indicates a possible downgrade.

Differences from Other Rating Providers

S&P is one of several agencies that assess the financial strength of insurers, but its approach differs from others in methodology and emphasis.

Moody’s places greater weight on an insurer’s ability to meet debt obligations relative to industry peers, while S&P incorporates both credit risk and operational resilience. Fitch Ratings integrates a more forward-looking perspective, adjusting ratings more aggressively based on anticipated changes in interest rates, inflation, or sector-wide shifts.

A.M. Best specializes in insurance-specific ratings, focusing more on underwriting performance, reserve adequacy, and policyholder surplus. This sometimes results in higher ratings for insurers with strong underwriting results, even if their overall financial metrics appear weaker by S&P’s standards.

Relevance for Policyholders and Investors

S&P insurance ratings influence both policyholders selecting coverage and investors evaluating financial opportunities.

Policyholders use these ratings to assess an insurer’s ability to pay claims, particularly for long-term policies such as life insurance or annuities. Lower-rated insurers may offer competitive premiums but carry a higher risk of financial instability.

Investors, including bondholders and equity shareholders, use S&P ratings to gauge an insurer’s creditworthiness. A downgrade can signal financial distress, while an upgrade may indicate improved profitability and risk management.