More than 10% of S&P’s insurance ratings to be placed “under criteria observation” (UCO) as a result of the adoption of the rating agency’s new capital model criteria, according to a new report by Litmus Analysis.
As S&P’s Request for Comment (RfC) period for the proposed changes has ended, the agency is now reviewing those comments and deciding on the final execution of the new model criteria.
According to Litmus Analysis: “S&P estimates that 10% of its insurance ratings could change (be upgraded or downgraded) as a result of the adoption of its new criteria. We understand that the 10% estimate is not intended by S&P to represent the upper bound of possible rating changes.
“Once it formally adopts any new criteria S&P’s policy is immediately to publicly disclose all ratings that could be changed. It does so by designating those ratings as “Under Criteria Observation” (UCO).”
Analysts added: “In parallel, it informs the rated firms with ratings on the UCO list of that fact, i.e., rated firms do not get advance notice from the agency of their ratings receiving the UCO designation.”
Litmus Analysis believes it is likely the new criteria, and hence UCO list publication, to be adopted in late Summer or early Autumn. However, the exact timing is not known.
“Hence S&P may well designate more than 10% of its re/insurance ratings as being UCO shortly before (or not too long after) the Monte Carlo Rendezvous.” analysts added.
“We expect the number of UCO-designated ratings to be greater than the 10% S&P rating change estimate because we understand S&P’s policy to mean that it will seek to have all ratings designated as UCO that it can envisage might change due to the new model criteria.”
Rated re/insurers will know whether the UCO status could indicate possible ratings upgrades or downgrades, however, this will not be part of S&P’s public disclosure, Litmus Analysis noted.
Despite a rating having the UCO designation, S&P’s rating opinion remains unchanged unless and until a rating committee subsequently decides to change the rating.
“Resolution of a rating’s UCO status could take anything between a matter of weeks and six months,” according to analysts. “S&P estimates that there will be more upgrades than downgrades, and that “the majority of” changes will be by no more than one notch.”
Litmus Analysis understand S&P’s goal, derived from its ratings surveillance policy wording, is that any rating subsequently changed by application of the new criteria will have been on the UCO list.
Analysts therefore expect that the UCO list will be longer than what would be implied by S&P’s estimate that 10% of ratings that could be changed.
