When ratings companies make changes to the way insurers determine the creditworthiness, it is usually a dull affair, steeped in technical subtleties.
The latest effort by S&P Global Markets has managed to anger insurers, state insurance regulators and rival ratings firms. It has also accomplished the impossible: bipartisan opposition to its actions on Capitol Hill.
Announced in December, S&P’s proposed changes are broad, but most criticism has focused on how the firm will shape life insurers’ investment portfolios. S&P will lower or downgrade ratings on securities that the firm has not rated itself. This analysis feeds into its assessment of a carrier’s overall soundness.
Firms like S&P get paid for rating bonds. The harshest critics argue that the S&P is trying to grab market share under the guise of reforming its model.
S&P says it is not. The goal is to “improve our ability to differentiate at risk,” a spokesman said. The last overhaul happened 12 years ago, and the changes will bring the model more in line with its global methodology for assessing insurers.
The responses were received during S&P’s comment period, which has been extended by two months to April 29 to allow for more feedback.
How S&P shapes risk in the insurance industry is no small matter. It is one of the major firms to issue “financial strength ratings,” which agents and brokers rely on to determine which carriers they recommend to their clients. Its credit rating, meanwhile, determines the cost of borrowing companies.
Other companies such as AM Best Company, Fitch Ratings and Moody’s Investors Service play similar roles. A risk to the S&P, if the proposed changes are that it could lose some business, critics said. Rivals declined to comment.
The S&P effort assumes greater significance as it is expected to impact some of the investments that insurers use to boost returns amid lower interest rates. These include privately issued securities, collateralized debt obligations and asset-backed bonds.
According to a January report on rating firms by the Securities and Exchange, the S&P remains the most dominant rating firm in terms of overall ratings issued, but some smaller rivals have held significant market share in the asset-backed securities category since 2011. Has attained. commission. Firms have made progress in areas such as auto loans, aircraft and solar asset-backed securities, data shows.
Much of the industry’s inclination towards non-traditional investments has been fueled by private-equity firms that have acquired or taken large stakes in life insurance companies in recent years. State regulators’ concerns about rating quality surfaced last year, and since January, the standard-setting National Association of Insurance Commissioners has required insurers to file statements of credit ratings for privately issued securities.
In essence, the S&P proposes to treat certain securities as junk, lower the credit rating and sometimes completely separate them from other firms, even though a competitor rates them as investment-grade. have done In general, S&P will treat securities rated by Moody’s and Fitch more favorably on the basis that it has more data on their ratings than DBRS Morningstar, Egan-Jones Ratings Company and Kroll Bond Rating Agency LLC.
In a letter dated April 14, 26 congressional Democrats and Republicans asked the SEC to look into the S&P move. “Many affected stakeholders have expressed concern that this treatment of investments is potentially anti-competitive, and we share that concern,” the group wrote to SEC Chairman Gary Gensler. Lawmakers asked Mr Gensler to ensure there was “free and fair competition”.
Some insurers complain that S&P hasn’t provided data to justify its proposed changes. “Our broad concern is that we believe property fees need to reflect data-driven analysis,” Marianna Gomez-Vock, vice president of lobbying group American Council of Life Insurers, said in an interview.
“The S&P rating penalty for a non-S&P rating is a poor solution to a legitimate concern,” said Aaron Sarfatti, chief risk and strategy officer at life insurer Equitable Holdings Inc.