S&P rated (re)insurers may not be told whether a UCO rating designation indicates a potential upgrade or downgrade until not that long before the UCO resolution rating committee. Effective planning for that means running the model on themselves as early as possible.

31st August 2023

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. We expect 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. 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.

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.

LINKS to Litmus reference documents

UCO Primer

5 step guide

Executive Briefing

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 of the Litmus guide noted above).

At the same time as S&P adopts its new capital model criteria (Step 3 of the Litmus guide) 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, and possibly significantly more.  S&P has estimated 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. It gives no indication of the likelihood of a rating change (other than it is possible) or the direction (upgrade or downgrade).

In many cases the S&P analysts that follow any given (re)insurer with UCO designated ratings will then have significant work to do, including substantial engagement with the (re)insurer, 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.

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

However, further discussions with S&P have clarified that in many cases the agency will not feel able to do so until sometime after the UCO designation release, for the information gathering and review reason noted above. S&P’s analysts will not typically have been seeking the required information until the new model criteria is finalised and adopted, although some (re)insurers may have chosen to proactively provide this.

This matters because, for any given (re)insurer who wishes to avoid a potential downgrade through capital adequacy management actions (for which there are an array of potential options), waiting until they hear from S&P that the UCO indicates a downgrade risk could leave insufficient time to put a coherent and persuasive case together to present to S&P ahead of the UCO resolution rating committee. Not least because any such plan is likely to require significant internal work and board level discussion within the (re)insurer.

The finalised criteria and model adopted by S&P may differ somewhat from the May 2023 prototype model and RfC details. However, the agency has noted to Litmus on several occasions that it believes the May model and RfC would have already allowed (re)insurers to judge whether future UCO rating designations would be reflecting the potential for either an upgrade or a downgrade (it is theoretically possible but very unlikely that the UCO designation could indicate the possibility of either).

However, to maximise that insight a (re)insurer will have needed to have had both the capability and the focus to have sufficiently understood the criteria details and the wider S&P insurance ratings framework.

If they have not already done so it would seem prudent that any (re)insurer, for whom a risk of an S&P ratings downgrade would be a material concern, conducts a review of its credit profile using the May 2023 S&P RfC documentation and prototype model very soon.

Having done so, if a downgrade risk seems apparent, the (re)insurer will then have at least some time to plan how to respond. For example, either capital management actions that could sufficiently negate a negative impact of the new model and its associated criteria, or advance development of communication plans to users of the potentially downgraded rating(s).

Further background

The UCO designation is not a “rating action” (something that only a rating committee can typically decide upon). Rather it is advance public disclosure that the rating will be taken to a “UCO resolution” rating committee once S&P’s analysts have gathered and reviewed the information they need from the relevant (re)insurer.

S&P policy notes that all ratings that could change should be included on the UCO designation list (hence Litmus’ assumption that the list will include more than 10% of S&P’s insurance ratings).

Resolution of the UCO status of any given (re)insurer’s UCO designated ratings may take anything between a few weeks to a maximum of six months.

While the process of S&P’s analysts informing (re)insurers as to whether there is a positive or negative risk to the rating would act as a form of advance disclosure to the (re)insurer (albeit with no certainty of outcome), Litmus understands its primary purpose is to allow the (re)insurer to have the insight necessary to offer relevant new information or perspective it thinks the rating committee should be aware of. This helps to optimise the amount of relevant information available to the committee. This approach, and its purpose, is consistent with S&P’s normal practice for (re)insurer communication ahead of rating committees if they believe a capital driven rating action could be considered by the rating committee.



Stuart Shipperlee              stuartshipperlee@litmusanalysis.com

Peter Hughes                     peterhughes@litmusanalysis.com

About Litmus

Litmus Analysis specialises in helping the re/insurance industry understand credit risk, the ratings agencies, and the financial analysis of (re)insurers.  Its main areas of work are Ratings Advisory (helping companies manage their communications with the rating agencies), cedant analysis, (re)insurer selection and stress testing, market analysis, peer reviews & benchmarking and market security/counterparty credit risk management (including via the InsurTech application LitmusQ).

The Litmus team of consultant analysts all have a senior rating agency and/or broker market security background and includes the former heads of S&P Ratings Europe (insurance), A.M. Best EMEA and A.M. Best Asia Pacific.

For more information about Litmus and our range of services contact us at Litmus Analysis

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