If you read the business pages of your local paper or have researched financial purchases, such as insurance, you may have heard of Standard & Poor’s (S&P) and its well-known rating system. For consumers making financial decisions, it may be important to understand what the company is and the value of its rating system. S&P’s business intelligence is the product of in-depth, data-driven research and is highly regarded by financial professionals.

What is Standard & Poor’s?

Standard & Poor’s, also known as S&P Global, is an American company that dates back to the mid-1800s. The company began by producing a series of railroad guides for investors written by a man named Henry Varnum Poor. It later expanded into providing financial information on non-railroad companies and, in 1966, was acquired by McGraw-Hill. In its current iteration, S&P is considered one of the “Big Three” financial rating organizations along with Moody’s and Fitch Group.

Today, S&P is primarily a credit rating agency and produces regular reports on the debt that private and public companies, as well as countries and regional governments, carry. This information may be vital for financial professionals who need to know if investing in a certain company or other entity is likely to result in a gain or loss of funds.

What are S&P ratings?

Although S&P offers several types of ratings, it is most known for its overall long-term credit rating system. This is one of the most important indicators of financial health and determines a company’s “creditworthiness,” or the extent to which it is worth trusting to pay back debts to a lender.

S&P credit ratings

S&P’s issuer credit ratings take two forms: short-term credit ratings that assess a company’s obligations of one year or less and long-term ratings for longer obligations. The long-term issuer credit ratings is a forward-looking opinion of how likely it is that an entity will be able to pay back on any debt it acquires. This metric may help you determine the overall financial health of an insurance company and answers three questions:

  • Is the company creditworthy or, in other words, is it worth making a loan to?
  • How well can a company manage and repay their debt obligations?
  • What are the company’s financial strengths and weaknesses?

Standard & Poor’s insurance ratings are part of this system. In rating a home or car insurance company, S&P is indicating how likely it is that the insurer will have the funds to pay out on your claim, even in an unstable economic climate or following a large-scale disaster that results in many claims being filed at once. The higher the rating, the more solid the insurer’s financial standing is perceived to be and the more likely it is that your claim will be processed and paid out smoothly.

How S&P ratings work

Standard & Poor’s ratings are created by financial analysts who scour annual reports, news articles, business journals and more to glean information on a company or government. They also gather information from chief financial officers (CFOs) and other financial professionals at each company to gain a fuller scope of the company’s financial health.

A company’s attitude toward risk management is one of the most important factors. A company that takes on a great deal of risky debt may not earn as high a rating as a company that sticks with safer investment vehicles.

S&P financial strength ratings

Standard & Poor’s long-term issuer credit ratings are represented as letter grades, with AAA being the highest and D the lowest. A company that excels at its financial management may earn the coveted AAA rating, while a company that earns a D rating may be in a great deal of financial trouble. S&P analysts can add nuance to their ratings by adding a plus or minus sign to the letter grade.

For example, a company with a rating of AAA has the highest possible grade for money management, as far as S&P analysts have determined. Theoretically, a company at the highest end of the scale should be able to effectively manage economic hardship and stay solvent.

Grades AA to CCC can be bumped up or down with the addition of a plus or minus sign so that a company with an AA+ rating indicates slightly better performance with its debt management than a company with just an AA rating, but not strong enough performance to reach the AAA level. Below is the full spectrum of S&P long-term issuer credit ratings:

Letter grade Financial strength description
AAA Extremely strong
AA Very strong
A Strong
BBB Adequate
BB Facing financial uncertainty
B Vulnerable
CCC Vulnerable and dependent on good business conditions to continue
CC Highly vulnerable
C Highly vulnerable to non-payment with low expectation of recovery
D General default or breach
NR Not rated

Why Standard & Poor ratings matter

Standard & Poor ratings for insurance companies may help you understand the overall financial strength of an insurer. If an insurer is rated poorly for long-term issuer credit, that means that its financials aren’t likely strong enough to make lending companies feel comfortable. If a lender is worried that an insurer won’t be able to pay back its debt, that could also indicate that a company may not have the financial strength to adequately pay claims.

When you are searching for the best insurance policy for your own needs, the S&P rating may be one tool in your arsenal. Most insurance companies include their S&P ratings on their website and, if not, you can usually find the rating with a simple Google search. Companies with ratings from AAA thru BBB are classified as “investment grade” whereas companies with ratings of BB are considered “speculative grade” and therefore have greater vulnerability.  Companies that rank higher on the S&P rating scale may be more likely to be able to pay your claim regardless of the current economic climate.

Frequently asked questions

    • The Standard and Poor’s 500, more commonly called the S&P 500, is a stock market index. Using its extensive database of information, S&P analysts track companies that are publicly traded in the U.S. The top 500 companies make up the index and represent roughly 80 percent of the companies that trade on the stock market. The S&P 500 index is considered one of the best-educated gauges of U.S. equities, financial strength and creditworthiness. It includes companies such as Apple, Microsoft and Berkshire Hathaway.
    • The S&P rating scale focuses primarily on the likelihood that a company, city or country is headed for default, which is somewhat different than ratings from the other two “Big Three” companies, Moody’s and Fitch Group. Each of the three companies uses its own scale to determine financial stability. An S&P rating of “AAA,” for example, is similar to Moody’s “Aaa” rating.
    • Standard and Poor’s ratings for long-term issuer credit are an assessment of a company’s creditworthiness, which means a company’s ability to pay back its debts over a period lasting longer than a year. The score is based on a company’s overall financial situation, including the amount of debt a company has, its payment history and its revenue. Each company may have a unique financial situation, which is why the S&P ratings scale allows the nuance of adding a plus- or minus-sign to each rating.