What You Need to Know About Standard & Poor’s Ratings?

If you are wondering about who Standard and Poor’s is or what exactly they do, you have come to the right place. S&P is one of the best rating agencies around who give companies ratings for consumers to understand fully about the company they are inquiring about and make the most educated decision possible. Here at InsureChance, we provide the more unbiased, informative articles in order for our clients to come to their own conclusions without having opinions shoved down their throats. The following are some key points from the article;

1. Standard & Poor’s has been around since 1860, when Henry Varnum Poor published his book named History of Railroads and Canals in the United States.
2. S&P Global Ratings is exactly what their name is, a rating firm.
3. They have been around for more than 150 years and are the world’s leading provider of credit ratings.
4. S&P is located all over the planet, they are located in 28 different countries and have approximately 1,500 credit analysis.
5. Credit ratings are formulated opinions about credit risk.
6. Credit ratings might play a beneficial role in allowing organizations and governments to raise cash inside the capital markets.

S&P’s History

Standard & Poor’s has been around since 1860, when Henry Varnum Poor published his book named History of Railroads and Canals in the United States. This book is filled with information about the financial and operational state of U.S railroad companies. Eight years later, Henry Varnum Poor established H.V and H.W Poor Co. with his son, Henry William Poor, and published two annually updated hardback guidebooks, Poor’s Manual of the Railroads of the United States and Poor’s Directory of Railway Officials. Luther Lee Blake in 1906 founded the Standard Statistics Bureau which provides financial information on non-railroad companies and instead of an annually published book, Standard Statistics 5” x 7” cards that can be updated if needed. Standard Statistics merged with Standard & Poor’s Corp in 1941 and in 1966 the company was acquired by The McGraw-Hill Companies.

What is Standard and Poor’s?

S&P Global Ratings is exactly what their name is, a rating firm. They have been around for more than 150 years and are the world’s leading provider of credit ratings. On their website, they say that  S&P have over 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. This company is in place for consumers to understand and educate them in order for them to make confident decisions. Their ratings are also essential to driving growth. S&P is located all over the planet, they are located in 28 different countries and have approximately 1,500 credit analysis. In 2016 alone they rated more than $3.7 trillion in new debt!

What are credit ratings?

Credit ratings are formulated opinions about credit risk. S&P formulates opinions about the ability and willingness of an issuer which can mean as a corporation or state or even city government, to make sure that they meet their financial obligations in full and on time. Standard and Poor’s company rates how likely a debt will be repaid. These ratings aren’t investment recommendations and cannot predict the probability of default but you can still use S&P ratings to help you decide whether to buy a bond or not because they also rate the creditworthiness of individual bonds. These ratings can even tell you how a country’s economy is doing so that it can help you decide whether or not it would be worth investing in Forex trades or foreign stocks.

Who cares about credit ratings and why should I?

Credit ratings might play a beneficial role in allowing organizations and governments to raise cash inside the capital markets. as opposed to taking a mortgage from a financial institution, those entities occasionally borrow money directly from investors with the aid of issuing bonds or notes. investors purchase those debt securities, consisting of municipal bonds while expecting to receive interest plus of course the return of their capital. With the credit rating, it can help facilitate the process of issuing and purchasing bonds and other debts. They do so by providing an efficient and widely recognized measure of relative credit risk. Investors and market participants can use these ratings as a form of screening device to match the relative credit risk in order to make the most educated and responsible business decision.

Basically, if you are looking into a bond or investment in any company or stock you should check S&P’s rating because it will help you get a grasp on how financially stable the corporation is. I mean you don’t want to invest your hard earned cash into a company that either isn’t going to be around for 20 to 30-years, or a company that will lose your capital.  

How does S&P create their ratings?

Well, the whole process begins with the credit rating agency assigning a rating to the issuer, which can be corporations, governments, as well as to specific debt issues such as bonds, notes, and other debt securities. S&P’s rating opinions are formulated after an extensive analysis check by experienced professionals who are there to evaluate and interpret information from the issuers and some other available sources to even consider the formulated opinion. At this point, the analyst works with a team of other analysts to be able to obtain the most information from published report and interviews even their discussions with the issuer’s management. Then they use that information to assess the financial condition, their operation performance, policies and risk management strategies to conclude whether or not the rating is accurate. So basically they go through these steps;

1. The issuer requests a rating and signs an engagement letter otherwise known as a contract to be able to legally search through all information to formulate rating opinion.
2. With a team of analysts, the pre-evaluation process starts with reviewing the pertinent information.
3. Next, the analysts will meet with the management team to review and discuss their information gathered.
4. After the management meeting, the analysts will evaluate the information and propose their rating to the rating committee.
5. The rating committee will then review the lead analyst’s rating recommendation and then vote on the credit rating.
6. After the rating committee finalized the issuer’s rating then they will notify the issuer with a pre-publication rationale for its credit rating for fact checking purposes.
7. Then S&P publishes a press release announcing the public rating and post that rating on their website.
8. Lastly, S&P will make a goal of surveillance to keep the rating current by identifying issues that may result in either an upgrade or a downgrade.

S&P’s Rating scale

• AAA; This is the best score possibly made by S&P and is also known as the investment grade because it shows that the issuer is extremely strong and has the capability to meet their financial commitments.
• AA; This grade is also known as an investment grade because the issuer has a very strong capacity to meet financial commitments.
• A; This grade is also known as an investment grade because the issuer has a strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
• BBB; This grade is still known as an investment grade because they have an adequate capacity to meet financial commitments, but more subject to adverse economic conditions.
• BB; This grade is known as a speculative grade because the issuer is less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. In other words, this is the grade that you shouldn’t really invest in after this grade it goes downhill and isn’t worth investing.
• B; This grade is also known as a speculative grade because the issuer is more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. Basically if there is a disaster (which can happen without any warning) this can really affect the company because they are vulnerable and you really shouldn’t invest if your money will be in jeopardy.
• CCC; This grade is also known as speculative-grade because the issuer is currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
• CC; This grade is also known as a speculative grade because the issuer is HIGHLY vulnerable and default has not yet occurred but is expected to be a virtual certainty.So, this grade means that if a disaster happens they will fail miserably, because they’re already failing miserably.
• C; This grade is also known as a speculative grade because the issuer is currently HIGHLY vulnerable to nonpayment and ultimate recovery is expected to be lower than that of higher rated obligations. In other words, if they are not even paying why invest in a company that can’t handle their own finances?
• D; This grade is the last grade that the issuer can receive and it is still known as a speculative grade because the issuer has payment default on a financial commitment or breach of an imputed promise and also used when a bankruptcy petition has been filed or similar action has taken. So, don’t even waste your time because a company with this rating is incompetent! They will definitely not be around for 20 or 30 years, so don’t invest!

Shopping for Life insurance?

Well if you are shopping for life insurance you will come across a lot of companies who swear up and down that they are competent and responsible and all the goodies but the best thing to do is immediately go on their website (because they have to show their rating) and check their rating out, then you can come up with your own opinion of the company. This will help you narrow down the companies you are inquiring about and will cut you some time. Also, another thing you can do if you are shopping for life insurance, look at some reviews because in the reviews (at least the really good ones) should show the company’s rating and it will also give you some information that the company website will not provide or will but takes forever to find. I mean even if there was a sock company with horrible uncomfortable socks that itch, of course, they won’t enclose that information on their website! Because then they would lose so much money, that’s what you have to think about when looking at any company’s’ websites.

If you are wondering about why it is crucial to know a company’s rating, that is because it shows how financially stable they are and how much you can trust them. Let’s say you choose to invest in an insurance company who advertise quick approvals and applications, and realized “Hey, I’m pretty busy with life and have no time to deal with life insurance, maybe this company is right for me!” Then you decide to do the application online without checking out the company and BAM you are insured. 10 years passes and disaster strikes and the market crashes, the top ‘A’ rated companies seem to be standing tall and strong but not the quick approval quick application company you got coverage from 10 years ago. You don’t think anything of it because you’re too busy with life to give it a second thought. You get a notification a couple weeks later stating that you are no longer covered and all the money you invested in premiums are gone with the wind because the company no longer exists, they are bankrupt. Had you checked the company’s rating it would have demonstrated how weak and vulnerable they are with financials. Don’t lose money, invest some time into looking up the insurance companies you are inquiring.

Final Thoughts

In conclusion, S&P is one of the top rating agencies out there and you can trust their ratings on companies if you either want to invest in bonds or simply want to invest in a life insurance company. Remember to always shop around and if your life is too busy to compare and contrast, then give us a call, we are an independent life insurance brokerage who only work with top ‘A’ rated companies. Here at InsureChance, we will compare the best companies to find the most affordable premiums with the maximum coverage for all our clients. Our motto is to make life insurance more simple, let us make your life a little more simple. Give us a call  888-492-1967.