Litmus advises re/insurers to run prototype of S&P’s new capital model ahead of adoption

Litmus Analysis recommends re/insurers run the prototype of S&P’s new capital model on themselves as early as possible to increase their time to put a persuasive case together to present to the agency ahead of the UCO resolution rating committee in case of downgrade risk.

Analysts urge re/insurers to do so as they believe S&P may not advise re/insurers whether the potential outcome of their rating status is positive or negative until close to the UCO resolution rating committee, which could be some time, even months later.

In May 2023, S&P released a prototype of its new capital model and an extensive update to its Request for Comment (RfC) documents – the RfC period ended on 14th July and S&P is now in step 2 according to Litmus’ guide.

At the same time as S&P adopts its new capital model criteria (step 3) its policy requires that it publicly designates any rating that might be upgraded or downgraded as a result of the new criteria adoption as being “Under Criteria Observation” (UCO).

Litmus believes that more than 10% of S&P insurance ratings are likely to be designated as UCO, possibly more. S&P estimates that around 10% of its insurance ratings could ultimately be upgraded or downgraded due to the new criteria, with upgrades being more common.

However, the UCO designation is just an initial flag of a possible rating action as it gives no indication of the likelihood of a rating change or the direction, if it will be upgraded or downgraded.

Following the UCO designation, S&P analysts would have to work with the re/insurers to fully understand and decide upon whether a rating change may be required, what the precise driver(s) of that would be, and what their rating recommendation to the rating committee will therefore be.

Initially, Litmus had understood that a re/insurer with UCO designated ratings would be told whether that status indicates the chance of an upgrade or a downgrade at the time of assignment of the UCO.

But this would not be the case as Litmus understands “S&P will only feel in a position to brief an insurer or reinsurer as to whether their UCO rating status indicates either the potential for an upgrade or downgrade once it has had the opportunity and time to gather and analyse enough information to attain a fully informed view.”

Litmus expects much of that information gathering and review process to follow the UCO designation’s public release.

“While the process is specific to any rating changes that derive from the change in S&P’s capital model criteria, S&P’s analysts will also be updating other aspects of the (re)insurer’s credit profile for the UCO resolution committee discussion,” analysts noted.

“While this may take some time even after the specific criteria change work is done, we nonetheless expect that there will not typically be a long gap between a (re)insurer being informed of the potential rating change and the decision by the rating committee.”

It was highlighted: “In Litmus’ opinion this further increases the potential importance for any (re)insurer with S&P ratings to run the prototype of S&P’s new capital model (including for year-end 2023, 2024 and 2025 forecast data), and to have fully understood the potential rating implications for its rating(s) of the new model criteria, ahead of S&P’s adoption of the new criteria.”

This is important because, if re/insurers wait to hear from S&P that the UCO indicates a downgrade risk they could end with not enough time to put a coherent and persuasive case together to present to S&P ahead of the UCO resolution rating committee.

By running the prototype model, and if a downgrade seems apparent, the re/insurer will then have at least some time to plan how to respond, Litmus notes.

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