S&P Global Ratings announced that it lowered its financial strength and counterparty credit ratings on United Services Automobile Association (USAA) and its core insurance subsidiaries to “AA” from “AA+” yesterday, citing problems at the banking business in support of the move.

“Historically, until 2020, USAA’s banking subsidiary reliably contributed around $1 billion to the group’s consolidated generally accepted accounting principles (GAAP) pretax income, helping to mitigate the volatility in P/C [property/casualty] underwriting results,” according to the downgrade announcement, which said that the $1 billion contribution reversed to an average pretax loss of $236 million for USAA Federal Savings Bank (FSB) from 2020 to 2024.

“We anticipate the company’s consolidated income, including contributions from the banking operation, to improve in 2025 and 2026, however, [likely] not at the same level as its historical contribution, which limits our view of diversity,” the rating announcement said.

In December 2024, the Office of the Comptroller of the Currency (OCC) issued a consent order against FSB, mandating that the bank address various deficiencies—some of which existed and were highlighted in prior OCC orders in 2019 and 2022, along with some new ones.

The OCC order “requires the bank to take comprehensive corrective actions to enhance its risk governance, compliance risk management, information technology management, fraud risk management, and third-party, affiliate, and shared services risk management. The order also imposes limitations on the bank’s ability to add certain new products and services, as well as expanding its membership criteria,” according to a December 2024 OCC statement.

Related: OCC Issues Comprehensive Cease and Desist Order Against USAA Federal Savings Bank | OCC (Dec. 18, 2024); Consent Order – USAA Federal Savings Bank (Dec. 18, 2024)

“While the company’s earnings have improved overall, the regulatory compliance issues with the bank have strained its financial performance and overall earnings diversity of the group,” S&P said in the downgrade announcement. (Editor’s Note: This statement was updated by S&P on May 28, revising prior wording contained in the original May 27 S&P statement.)

The underperformance of the banking business prompted S&P to revise the “competitive position” component of the rating down to “very strong” from “excellent,” reflecting S&P’s view that the company’s resilience to adverse operating conditions has deteriorated compared with peers at the “AA+” rating level.

“Our opinion continues to encapsulate USAA’s leading market position in the property/ casualty (P/C) insurance sector, high retention rates, substantial barriers to entry in its targeted markets, and a significant improvement in its underwriting profitability in 2024,” the S&P announcement said, noting that the ratings outlook is stable.

Referring specifically to the insurance operations, S&P noted USAA’s distinguishing commitment to serving the military community and their families as one of the largest insurers of personal auto and homes in the U.S.

According to S&P, the P/C operation reported pretax income of $4.5 billion in 2024 and $912 million in the first quarter of 2025, marking a big improvement compared with the previous three years (2021-2023). S&P stated that the bottom lines for those years were impacted by high catastrophe and auto claim losses, listing the pretax results as $895 million of income for 2023, preceded by a loss of $1.9 billion in 2022, and income of $2.7 billion in 2021.

Estimating that USAA’s insurance ops implemented high double-digit rate increases in both personal lines over the period from 2022-2024—32 percent on auto and 22 percent on homeowners—S&P expects improved results as those rate hikes continue “to earn in.”

“Additionally, we anticipate that the consolidated premium growth will rise amid strong retention and pricing, coupled with an increase in membership growth,” the S&P statement said, offering S&P projections of combined ratios of 93-95 for 2025 and 2026, along with pretax earnings of $4.5 billion to $4.7 billion for these two years. The forecast assumes 7 percent premium growth, which aligns with the company’s pricing and membership growth strategy, the S&P statement says.

S&P also expects USAA to maintain capital adequacy above the 99.99 percent confidence level, equivalent to an extreme stress scenario.

Reacting to the downgrade, USAA issued the following statement:

“USAA’s steadfast commitment to provide exceptional service and value to our members is backed by outstanding financial strength. We remain highly rated by all three credit rating agencies. As our most recent Annual Report shows, USAA is financially strong, with some measures nearing record levels. Today, our credit profile is excellent, our capital levels are robust and each of our businesses are healthy. Those are among the reasons USAA added more than 1 million members last year. USAA is building on our momentum and is well-positioned for the future.

S&P said that the stable outlook on its ratings reflects the insurer’s improved underwriting margin and progress addressing the regulatory deficiencies identified in USAA’s banking operation, as well as the company’s prominent market leadership and robust capital adequacy.

Noting a historical level of disciplined underwriting, “S&P Global Ratings expects the company will maintain an industry leading [level of] performance” in support of the stable outlook, the ratings announcement said.

“In addition, the outlook reflects the company’s ability to overcome regulatory challenges without hindering the group’s competitive advantage, including its strong brand equity.”

Underperformance at USAA’s core operating subsidiaries, when measured against “AA”-rated peers, or erosion of capital over an extended period could prompt a downgrade over the next 24 months.

S&P said it is unlikely to raise ratings in the next 24 months. The bank subsidiary’s earnings would have to recover to historically strong levels and become a significant source of noncorrelated revenue to USAA to prompt an upgrade.

In yesterday’s announcement, S&P also reported that the rating agency lowered its long-term counterparty credit rating on an intermediate holding company, USAA Capital Corp., to “AA-” from “AA,” assigning a negative outlook to that rating.

Source: S&P Global Ratings