S&P lowers USAA rating, citing bank weakness and insurance gains

S&P Global Ratings, a provider of independent credit assessments and financial analysis, has downgraded the credit ratings of United Services Automobile Association (USAA) and its core insurance subsidiaries from ‘AA+’ to ‘AA’.

The ratings firm, known for its evaluations of companies’ creditworthiness and financial stability, assigned a stable outlook to the insurance group while maintaining a negative outlook for USAA’s intermediate holding company, USAA Capital Corp. (CapCo), whose rating was lowered from ‘AA’ to ‘AA-’.

According to S&P, the downgrade stems from persistent underperformance in USAA’s banking operations, particularly at USAA Federal Savings Bank, which remains under a regulatory consent order issued by the Office of the Comptroller of the Currency.

While the company has made progress addressing compliance deficiencies, the issues continue to weigh on overall earnings and have reduced the group’s income diversification. S&P now considers USAA’s competitive position to be “very strong” rather than “excellent,” due to diminished resilience when compared with similarly rated peers.

Historically, the bank contributed significantly to the group’s earnings, generating around $1 billion in annual pretax income before 2020. However, from 2020 to 2024, the banking division posted an average pretax loss of $236 million.

Although S&P anticipates improved results over the next two years, it expects the bank’s contribution to remain well below historical levels, reinforcing the group’s dependence on its insurance operations.

S&P’s report noted strong gains in USAA’s property and casualty insurance performance. The group reported $4.5 billion in pretax income in 2024 and $912 million in the first quarter of 2025.

These results mark a sharp recovery from recent years of losses driven by high catastrophe and auto claim costs. S&P attributes the turnaround to substantial rate increases and strong customer retention, projecting a continued combined ratio of 93%–95% and premium growth of 7% through 2026.

USAA is also expected to maintain capital adequacy above S&P’s most stringent stress scenario threshold, supported by projected dividends and distributions of $1.3 billion over 2025–2026. S&P expects the group’s solid operating earnings to preserve this capital strength.

The stable outlook reflects S&P’s view that the insurance operations will remain strong and that regulatory remediation is progressing.

However, the negative outlook on CapCo highlights concern over declining revenue diversity and increased reliance on insurance subsidiary dividends for liquidity.

S&P stated that a further downgrade could occur if operating performance falls below expectations or if capital weakens significantly.

An upgrade, however, is unlikely in the near term and would require the banking arm to recover fully and contribute meaningfully to group earnings once again.

Commenting on S&P’s action and its overall financial strength, USAA said: “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.”

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