The Big Idea

S&P rethinks its proposal for rating insurers

| May 13, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

S&P has decided to withdraw parts of its recent insurer rating proposal that would have penalized companies investing in securities without an S&P rating. The agency on May 9 announced plans to redraft the proposal and put it out for comment. For the moment, this puts a hold on a proposal that already had started to shape issuers’ and investors’ willingness to take ratings from KBRA, DBRS Morningstar and other smaller agencies.

The decision follows an April 29 letter from the US Department of Justice warning of antitrust risks in the proposed approach. The letter warned of potential violations of the Sherman Act and urged S&P to carefully consider whether its actions would create barriers to entry and suppress competition in the ratings industry. The proposal also drew sharp criticism from the Structured Finance Association, the CRE Finance Council, the National Association of Insurance, Commissioners and KBRA, among others.

The rating agency withdrew provisions that would have lowered ratings by one notch to three notches on securities rated only by Moody’s or Fitch, and that would have treated securities without an S&P, Moody’s or Fitch rating as ‘CCC’. S&P’s proposed approach uses adjusted ratings in part to evaluate insurer capital. The lower ratings would have raised capital requirements, especially for securities treated as ‘CCC’. For securities rated ‘AAA’ by KBRA, DBRS Morningstar, Egan-Jones or other agencies but treated as ‘CCC’ by S&P, analysis by Amherst Pierpont indicted required capital could have gone up by more than 1,000 times.

KBRA reported this spring that at least seven issuers had halted ratings in progress in light of the proposal, and some investment bankers reported taking deals to S&P that otherwise might have gone to a smaller agency.

S&P’s current approach for rating insurance companies will stay in place until the agency issues new rules.

Steven Abrahams
sabrahams@apsec.com
1 (646) 776-7864

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