Despite the onset of the COVID-19 pandemic and sudden global recession, defaults of financial services issuers fell to a six-year low in 2020. Significant government stimulus measures to support households and businesses and accommodative monetary policies from the world's central banks helped to limit the economic damage of COVID-19 and curb the risk to financial services.

Even as defaults of nonfinancial corporates rose to their highest level since the global financial crisis, financial services were less impacted as the industry showed resilience following years of strengthening balance sheets and capital buffers. The number of rated financial services defaults fell to five in 2020, from nine in 2019 (see chart 1). All of the 2020 defaults were of issuers that were rated 'B' or lower at the start of the year, and there were no defaults from investment-grade (rated 'BBB-' and above) financial services issuers for a fourth consecutive year. The speculative-grade (rated BB+ and lower) default rate for financial services fell to 0.94%, dropping below 1% for the first time in six years.

Although the financial services sector faced fewer defaults in 2020, credit quality was not unscathed by the pandemic, as downgrades more than tripled from their prior year total, outpacing upgrades by 6 to 1.

In this study, we review the defaults, rating transitions, and ratings performance of financial services broadly, in the following sectors:

• Banks: bank holding companies, bank subsidiaries, savings and loans, credit unions, and government-related entities;
• Nonbank financial institutions (NBFIs): a loose grouping of highly diverse companies, including broker-dealers, asset managers, finance companies, financial market infrastructure companies, and other financial entities that share some common features; and
• Insurance: life insurance, health insurance, property/casualty insurance, reinsurance, bond insurance, mortgage insurance, insurance brokers, and title insurance, as well as insurance-related service providers.

We calculated default and transition rates based on the number of issuers in the sample period. The default rates we refer to as weighted averages in this study use the number of issuers at the beginning of each year as the basis for each year's weight (see Appendix II for terms and definitions).

Our findings show that S&P Global Ratings' credit ratings continue to serve as effective indicators of relative credit risk for financial services companies. We identified a clear negative correspondence between ratings and defaults: The higher the issuer credit rating, the lower the observed default frequency.

We show the relationship between ratings and defaults with the Gini ratio, which is a measure of the rank-ordering power of ratings over a given time horizon (see table 1). This measure shows the ratio of actual rank-ordering performance to theoretically perfect rank ordering. In 2020, the Gini coefficient for financial services fell to 94.7%, down from a recent high of 98.3% in 2019. Two defaults in 2020 were from issuers that started the year with a rating of 'B'. In 2020, the one-year Gini coefficient for financial services remained above 90% for a ninth consecutive year, as financial services companies have been exhibiting lower ratings prior to default (see chart 2).

Over longer time horizons, Gini ratios continue to attest to ratings as effective indicators of relative default risk. The one-year weighted-average Gini coefficient for financial services is 80.35%, the three-year is 70.29%, the five-year is 62.99%, and the seven-year is 57.54%. These weighted-average Gini ratios are weighted by yearly issuer counts since 1981 (see Appendix II for details).

Table 1

Defaults In 2020

• The speculative-grade default rate for financial services companies dipped to its lowest level since 2014, falling to 0.94% in 2020 from 1.69% in 2019 (see table 2).
• All of the defaulters in 2020 were initially rated speculative-grade, and the issuer with the highest initial rating was first rated 'BB' back in 2013.
• By sector, the financial services defaulters in 2020 were two banks, two NBFIs, and one company from the insurance sector.
• By country, the NBFI defaulters were from the U.S. and New Zealand, the banks from Argentina and Chile, and the insurance company from Kazakhstan.
• By rating, defaults were concentrated among the lowest-rated entities: Two of the defaulters were rated 'B' at the beginning of the year, one was rated 'B-', and two were rated 'CCC'.
• Three of these defaults resulted from missed interest payments, and two were distressed exchanges.
• Among the entities that defaulted in 2020, the average time to default was 9.4 years from the initial rating, marginally down from an average of 10 years for the issuers that defaulted in 2019.

Table 2

Table 3

There were far fewer defaults from financial services than from nonfinancial companies in 2020. The financial services default rate (based on both investment- and speculative-grade issuers) declined to 0.23% in 2020, much lower than the 3.81% default rate for nonfinancial corporates (see chart 3). Furthermore, each of the financial services sectors--banks, NBFIs, and insurance--exhibited default rates below 0.5% for the year.

Among financial services, the NBFI sector had the highest default rate, at 0.42%, down from 0.85% in 2019 as the number of NBFI defaults fell to two in 2020 from four in 2019. One of these defaulters, New Zealand-based FE Investments Ltd., missed principal and interest payments after it was placed into receivership for its inability to maintain capital above the regulatory minimum. The other defaulter, U.S.-based Populus Financial Group, completed a tender offer that we viewed as a distressed exchange.

The bank sector default rate dropped to 0.23% in 2020 from 0.46% in 2019, as bank defaults fell to two in 2020 (from four in 2019). Both of these defaults were Latin American banks. Issuer ratings on Argentina-based Banco Hipotecario S.A. were lowered to 'SD' (selective default) after the issuer completed an exchange offer that we viewed as distressed given the proximity of the maturities and the uncertainty of the compensation to credit holders. Ratings on Chile-based Corp Group Banking S.A. (which is a nonoperating holding company) were lowered to 'D' (default) after it missed a bond coupon payment. The company has participation in the Chilean bank, Itau Corpbanca, which was not affected by the default.

The insurance sector had a default rate of 0.12% in 2020, with one default from the sector (equal to 2019's total). Kazakhstan-based Grain Insurance Co. JSC was the lone defaulter from the insurance sector after it missed several payments to counterparties following the six-month suspension of its license by the Kazakh insurance regulator due to breach of regulatory ratios.

Each of the financial services sectors showed default rates in 2020 that were less than half of their long-term weighted average (see table 4). Those financial services issuers that defaulted in 2020 largely faced idiosyncratic challenges that led to their defaults. By contrast, the nonfinancial sector experienced a default rate that was nearly twice its long-term average due to the abrupt economic shock and sudden deterioration in business conditions from the COVID-19 pandemic, lockdown restrictions, and the collapse in oil prices, with most defaults concentrated among consumer services and energy and natural resources.

Table 4

Financial Services Rating Trends In 2020

Rating actions on financial services companies took a sharply negative turn in 2020. Following three years where upgrades exceeded downgrades, six financial services issuers were downgraded for each that was upgraded in 2020. This pushed the downgrade-to-upgrade ratio to its highest level since 1991. 10.6% of financial services issuers were downgraded during the year, more than triple the rate from 2019. And the share of upgraded issuers fell to a new low of 1.77%, down from 7.85% in 2019. While this set a new low for upgrades, the increase in downgrades brought the downgrade rate near its long-term average of 10.4%.

Despite the turbulence in markets and the escalation in downgrades, financial services ratings were largely stable during the year--82% of ratings were not changed during the year. This proportion of unchanged ratings remained above the long-term weighted average of 75%.

Table 5

Banks

In 2020, bank downgrades outpaced upgrades by more than 10 to 1, as the downgrade-to-upgrade ratio reached its highest level since 2009. Just over 12% of banks were downgraded during the year (up from 2.55% in 2019), and just slightly above the long-term annual average of 11.4%. The share of upgrades plunged to 1.16% (from 9.50%), (see Appendix I for detailed statistics by sector).

Bank downgrades were concentrated in the emerging markets. Mexican banks led downgrades, as many issuers were downgraded on March 26, 2020 after the long term foreign currency sovereign credit rating on Mexico was lowered to 'BBB' from 'BBB+' (see "21 Mexican Financial Institutions Downgraded On Same Action On Sovereign And Increasing Economic Risks For The Sector," March 27, 2020). Also, in Latin America, there were multiple downgrades of Argentine banks after the central bank took actions that could limit access to foreign exchange, which led us to lower our Transfer & Convertibility (T&C) assessment on Argentina to 'CCC+'. Emerging market bank downgrades also included multiple issuers from Nigeria and South Africa that followed sovereign rating downgrades.

NBFI

NBFI led financial services downgrades in 2020 as 17.78% of NBFIs were downgraded during the year, up from 4.7% in 2019. By contrast, the share of NBFIs that were upgraded fell to 1.05% from 7.48%. There were 17 downgrades for each upgrade, marking a new high in the downgrade-to-upgrade ratio and bucking the trend of three consecutive years when upgrades outpaced downgrades.

Emerging market companies accounted for the largest number of NBFI downgrades, led by downgrades from Mexico and India. Downgrades of several Indian finance companies cited the increased risk that these companies faced as a result of COVID-19 and recession.

Downgrades also included several finance companies from the U.S. with high exposures to consumer lending and real estate.

Insurance

Insurers had the lowest rate of downgrades in 2020, and this is the only the financial sector where the proportion of downgrades-to-upgrades was below the long-term weighted average. The share of insurance issuers that were downgraded grew to 4.69% (from 2.59%), while upgrades declined to 2.84% (from 6.30%). Within financial services, insurance ratings were the most stable--86.3% of ratings were not changed during the year.

While financial market stresses related to COVID-19 cut into the capital buffers of the insurance industry during part of the year, most companies maintained sufficient cushions for their rating levels, especially given the quick rebound in asset prices.

76% Of Financial Services Are Rated Investment Grade

Even with downgrades escalating in 2020, investment-grade issuers grew slightly as a proportion of financial services ratings--up to 76% as of Dec. 31, 2020 from 75% as of Jan. 1. This slight increase reflected a decrease in the number of speculative-grade financial services issuers, as fewer investment-grade ratings were withdrawn (see chart 5).

Even though financial services accounts for around 30% of rated issuers globally, a much higher proportion of investment-grade issuers (46%) are financial services. Among financial services, the 'A' rating category is the largest, accounting for 38% of issuers, followed by the 'BBB' category with 28%.

Within speculative-grade issuers, the largest share of financial services issuers is rated in the higher rating levels. Nearly half of speculative-grade financial services companies are rated in the 'BB' category, and just 4% of speculative-grade financial services issuers are rated in the lowest rating category of 'CCC+' and lower. The sample size of lower-rated issuers was markedly smaller in several of the earlier years covered in this study. The number of speculative-grade financial services issuers did not surpass 100 until 1998, and there were less than 10 issuers rated 'B+' and lower annually between 1981 and 1985. Sample-size considerations such as these can be seen in periods where a very small number of transitions are reflected in a larger-than-expected transition rate.

Financial services in the U.S. and emerging market regions each have a higher portion of issuers rated speculative-grade than in either Europe or the other developed region. In the U.S., 20% of financial services are speculative-grade, reflecting the larger proportion of speculative-grade NBFIs. Just 12% of financial services ratings in Europe (and 4% in the other developed region) are speculative-grade.

Meanwhile, 42% of emerging market financial services' issuers are speculative-grade, in part because of the lower sovereign ratings within this region. The majority of emerging market sovereigns are rated speculative-grade. While the sovereign rating does not act as a ceiling for other ratings, for an entity to be rated higher than its sovereign, the entity would need to show sufficient creditworthiness to withstand a sovereign default (see chart 6).

Number Of Rated NBFIs Continues To Grow

Over the last five years, the number of rated NBFI issuers grew by 15%, even as the number of rated banks and insurance companies contracted by 5% and 7%, respectively (see chart 7). As banks have adjusted to rising capital and new regulatory requirements since the global financial crisis, the NBFI sector has shown continued growth as new nonbank lenders, finance companies, and business development companies have entered the market. While the number of rated NBFIs is growing, this sector still represents the smallest share of financial services ratings (about 23%), while banks account for 39% and insurance for 38%.

NBFIs tend to be unregulated or more lightly regulated than banks and, by and large, do not benefit from government support. As a result, they tend to be rated lower than regulated banks and insurance companies. As of end-2020, 38% of NBFIs were rated speculative-grade, compared with 28% of banks and just 13% of insurers (see chart 7). This growth in NBFI ratings has contributed to the growth of speculative-grade issuers as a share of financial services' ratings, 24% of which were speculative-grade as of end-2020, steadily growing from 18% as of end-2009.

The share of banks rated investment grade climbed to 72% as of end-2020 from a low of 67% in 2016. Credit quality in the banking sector has shown continued improvement in the past several years as banks have strengthened balance sheets and expanded bail-in eligible capital reserves (see chart 8).

2020 Transition Rates And Ratings Performance

An analysis of transition rates in 2020 suggests that ratings behavior continues to be consistent with long-term trends, showing a negative correspondence between ratings and the observed frequency of default. Investment-grade financial services issuers globally tend to exhibit greater ratings stability (as measured by the frequency of rating transitions) than their speculative-grade counterparts (see table 6).

Table 6

For instance, 94.44% of issuers rated 'A' at the beginning of 2020 were still rated 'A' as of Dec. 31, 2020, whereas the comparable share for issuers rated 'B' was only 77.2%.

No 'AAA' rated financial services companies were downgraded in 2020. However, the number of 'AAA' rated financial services companies has been dwindling in recent years. For example, at the start of 2008, the number of 'AAA' rated financial services issuers totaled 74 globally. But by the beginning of 2020, just three 'AAA' rated financial services issuers remained:

• Nederlandse Waterschapsbank N.V. (Netherlands), which has an extremely strong capital base, very strong asset quality, and almost certain likelihood of extraordinary support from the Dutch Ministry of Finance;
• Public Sector Pension Investment Board (Canada), in addition to the stand-alone credit profile of 'aaa', the 'AAA' issuer rating reflects our opinion of a moderately high likelihood that the Canadian government would provide extraordinary support in the event of financial distress; and
• Zuercher Kantonalbank (Switzerland), which benefits from its close ties, including full ownership and a statutory guarantee, to the financially strong Canton of Zurich.

Annual Default Rates And Ratings Performance

All of our ratings performance studies have found a clear correlation between ratings and defaults: The higher the rating, the lower the observed frequency of default, and vice versa. Over each time span, lower ratings correspond to higher default rates. We found that the same was true when we broke out the data by rating as well as by region. As the Gini ratios show, the ability of financial services ratings to serve as effective measures of relative risk remains intact, particularly across larger pools of issuers.

Many default studies, including this one, also look at transition rates, which gauge the degree to which ratings change--either up or down--over a particular time. Transition studies have repeatedly confirmed that higher ratings tend to be more stable and that speculative-grade ratings generally experience more volatility.

Some issuers default after S&P Global Ratings no longer rates them. We make our best effort to capture such defaults in the database, and we include an entity in the annual default rate calculations if it was rated as of Jan. 1 in the year of default. If, however, S&P Global Ratings withdrew the rating prior to Jan. 1 of the year of default, we do not include the issuer in the default rate calculation in that year. Although defaulters that are not rated (NR) are not always captured in the default rate calculations for the year of default, we do capture them in the longer-term cumulative default rate statistics, which are tied back to the year in which defaulters were last rated.

The path to default for financial services has been more gradual in recent years

Financial services entities typically exhibit lower average default rates and account for fewer defaults annually than nonfinancial entities. However, the path to default for financial issuers can be relatively swift. Financial services companies are typically more confidence-sensitive than nonfinancial companies, and the loss of confidence from stakeholders (such as counterparties or funding sources) can contribute to a rapid decline in liquidity and credit quality.

From 1981-2020, financial services companies that defaulted had a median rating of 'BBB-' seven years prior to default, and the median rating remained investment grade (at 'BBB-') until just over five years prior to default. From that point, the defaulters experienced a relatively steep descent into default, with the median rating dropping to 'B+' one year prior to default.

In contrast, financial entities that defaulted over the past 12 quarters (2018-2020) experienced a much more gradual path to default from a much lower rating level. These issuers had a median rating of 'B' seven years prior to default, and this median fell to 'B-' over 3.5 years prior to default (see chart 9). Notably, the trailing-12-quarter median default rate for financial entities is based on a much smaller subsample of just 24 issuers, while the full history (1981-2020) covers 310 issuers.

In general, financial services entities with higher initial ratings, should they default, tend to show a longer time between the initial rating and the eventual default. The time to default for a defaulting issuer generally correlates with the initial rating. For example, for the entire pool of defaulters (1981-2020), the average time to default for financial entities that were originally rated in the 'AA' category was 13.74 years from initial rating, while those initially rated in the 'B' category experienced an average time to default of 4.08 years (see table 7). Note that the standard deviation of the time to default is also generally smaller for lower ratings.

We treat cases where an issuer emerges from a prior default (including from distressed exchanges), as a separate entity, with a new initial rating that is first recorded after the default event.

Table 7

While no financial services issuer has ever defaulted from the 'AAA' rating level over a one-year horizon, throughout the 40-year span of our study, there have been five financial services entities that eventually defaulted after receiving an initial rating of 'AAA'. These defaulters include Ally Financial Inc., formerly known as GMAC Financial, a subsidiary of General Motors Corp. The issuer credit rating on this company was lowered to 'SD' from 'CC' following a distressed debt exchange in December 2008. While this issuer was initially rated 'AAA', it was downgraded to 'AA+' in 1981, more than 27 years in advance of its eventual default in 2008. While GMAC Financial was an NBFI at the time of default, the reorganized entity, Ally Financial Inc., has since become a bank holding company.

The four other 'AAA' rated defaulters were from the insurance sector. This group includes three North American life insurers (Mutual Benefit Life Insurance Co., Executive Life Insurance Co. CA, and Confederation Life Insurance Co.) that defaulted from 1992-1994 because of a combination of illiquid assets and insufficient liquidity to meet maturing liabilities. These companies had asset portfolios with heavy concentrations of high-yield bonds, real estate investments, or commercial real estate loans, which lost value and were increasingly illiquid following the 1991-1992 U.S. recession. As policyholders lost confidence in these insurers, they accelerated withdrawals, which exacerbated the companies' inability to meet liabilities.

The remaining defaulter was bond insurer Ambac Assurance Corp., which was downgraded to 'SD' in 2009 due to being financially weakened through exposure to the U.S. subprime housing sector.

These insurer's defaults occurred as their asset values fell or as liabilities climbed following recession periods. S&P Global Ratings subsequently made adjustments to global insurance criteria to address the issues that caused these failures, including through the introduction of the capital model in 1994 and, more recently, through updates to most of the criteria for financial services companies following the global financial crisis.

Since 2011, S&P Global Ratings has further updated and revised the methodology and assumptions that it applies to determine the ratings on financial services companies. Rating methodologies and assumptions were revised in 2011 and 2019 (including a capital model update) for bond insurance, in 2013 and 2019 for insurance companies (including life, health, and property/casualty), in 2014 for NBFIs, and in 2015 and 2019 for mortgage insurance.

For banks, S&P Global Ratings updated its rating methodology and assumptions in 2011. The revised criteria also consider the relationship of the banking industry in a country to its financial system as a whole. The banking industry country risk assessment (BICRA) criteria were also updated in 2011, providing a framework to compare global banking systems, including the role of government supervision, regulation, and system wide support programs. The BICRA is the starting point for the issuer credit rating on a bank.

S&P Global Ratings published proposed criteria revisions for the BICRA and the financial institutions ratings methodology in 2021, and if adopted, these changes will result in further updates to the global framework for rating financial institutions.

Fewer defaults are observed among higher-rated entities

The lower frequency of default among higher-rated entities and higher rate of default among lower-rated entities remains true over time (see chart 10).

The relationship between default rates and ratings is most apparent through the cumulative rates, with the lowest rating categories exhibiting default rates far in excess of those in the investment-grade categories. The lowest investment-grade rating category, 'BBB', has a one-year weighted long-term average default rate (since 1981) of 0.23%. The average default rate more than doubles to 0.62% for the 'BB' category and rises further to 2.59% for the 'B' category and 18.03% for the 'CCC'/'C' category.

The only rating categories that exhibited defaults in 2020 were the two lowest, 'B' and 'CCC'/'C'. The default rate for the 'B' category fell to 1.20% in 2020 (from 1.59% in 2019), while the default rate for the 'CCC'/'C' category rose to 66.67% in 2020 (from 41.67% in 2019) and was the only rating category that showed a default rate above its long-term weighted average.

For financial services, the pool of issuers rated in each speculative-grade rating category is often relatively small, particularly for the 'CCC'/'C' category. Given the small base of ratings (particularly in earlier years), the default rate for entities rated 'CCC'/'C' has climbed as high as 100% (in 1982, when there was only one financial issuer rated 'CCC'/'C' at the beginning of the year), while the 'B' category default rate peaked at 25% in 1982 (with one default), (see table 8).

Table 8

By contrast, the relationship is slightly more discontinuous when we examine rating transitions across modifiers (the plus or minus after a rating) or by sector, but these variations are likely a result of sample size considerations, and we do not consider them significant (see table 9 for default rates by rating modifier and Appendix I for default rates by sector).

Additionally, when examining default rates by rating modifier, we see a few higher-than-expected default rates for some investment-grade ratings in certain years. For instance, in 1983, the default rate for 'BBB-' rated financial issuers climbed to 16.67%. Notably, this rate reflected the default of just one issuer, and the default rate for the 'BBB' category as a whole in 1983 was just 3.7%.

Since 1981, no financial services issuers rated 'AAA' or 'AA+' have defaulted over a one-year horizon. However, over this period, three financial services issuers rated either 'AA' or 'AA-' defaulted:

• General American Life Insurance Co.: After aggressively growing its Guaranteed Investment Contract (GIC) product line in prior years, the company did not have sufficient liquidity and was taken under administrative supervision in 1999, following a spike in surrender rates on these GICs.
• Lehman Brothers Inc.: The company filed for Chapter 11 bankruptcy protection in 2008 following the deterioration of its U.S. subprime housing assets.
• BluePoint Re: This company was taken over by its regulatory authority in 2008 as projected losses mounted on subprime and second-lien residential mortgage-backed security and asset-backed security collateralized debt obligations that it had reinsured.

More recently however, there have been no defaults from financial services issuers rated 'BBB+' or higher from 2010 through 2020.

Table 9

Average Transition Tables And Cumulative Default Rates

This study--in line with previous default studies--confirms that over the long term (1981-2020), higher ratings are more stable than lower ratings. For financial services entities, the highest rating categories, 'AAA', 'AA', and 'A', each displayed stability rates of 87% or higher for a one-year time horizon. Of these three rating categories, the 'A' category had the highest rate of stability, at 89.10%, meaning that 89.10% of 'A' rated issuers remained within that rating category over a one-year horizon. The stability rate was just slightly lower for the 'AAA' and 'AA' categories, although these categories also showed very high stability rates of 87.07% and 87.5%, respectively. In comparison, ratings in the 'B' category had a notably lower stability rate of 76.32% over a one-year horizon (see table 10).

When we examine rating transitions by modifier, the general relationship between rating and stability tends to hold (see table 11). For example, 'A+' rated issuers were still rated 'A+' one year later 78.83% of the time, and 'A-' rated issuers were still rated 'A-' one year later 78.14% of the time.

These long-term relationships also broadly hold when transition rates are calculated over longer time horizons and when broken out by region (see table 12), though we do see some exceptions, largely due to sample size considerations, which we do not consider significant.

Over the long term (1981-2020), heightened ratings stability is broadly consistent with higher ratings. A key observation when analyzing transition matrices that present averages computed over multiple static pools is that the standard deviations associated with each transition point in the matrix are large relative to the averages (outside of stability rates).

Table 10

Table 11

Table 12

Lower Ratings Are Consistent With Higher Default Vulnerability

Lower ratings continue to exhibit higher default rates over each time span (for example, as in the one- to 15-year time horizons shown in table 13). This generally holds true across regions as well, though some exceptions occur when the number of defaults is low or when the underlying population of issuers is very small--such as among the highest and lowest rating categories, or at the rating modifier level (see tables 14 and 15).

Investment-grade issuers seldom default, so the number of defaults among these rating categories is particularly low. This small sample size can result in historical default rates that appear counterintuitive. The cumulative default rates by rating modifier do not imply, for example, that 'AAA' rated companies are riskier than 'AA+' rated companies over a horizon of less than 10 years, but rather that both are highly unlikely to default. By rating modifier, each of the ratings from 'AAA' to 'A-' exhibits a 15-year cumulative default rate below 2.25%.

Table 13

Table 14

Table 15

Gini Ratios And Lorenz Curves

A quantitative analysis of the performance of S&P Global Ratings' credit ratings shows that ratings on financial services issuers correlate with the level of default risk across several time horizons. To measure ratings performance, we plotted the cumulative share of defaulters against the cumulative share of issuers by rating in a Lorenz curve to visually render the accuracy of the rank ordering (see Appendix III). Over the long term, the global weighted-average one-year Gini coefficient for banks is 83.67%, followed by insurance (74.95%) and NBFIs (73.76%), (see table 16).

Table 16

As expected, the Gini coefficients decline over time because longer time horizons allow for greater opportunity for credit degradation among higher-rated entities. For example, in the one-year global Lorenz curve, 82.68% of defaults occurred in the speculative-grade category, while speculative-grade ratings constituted only 17.7% of all financial services ratings. In the five-year Lorenz curve, speculative-grade issuers constituted 63% of defaulters and only 16.2% of the entire sample.

If the rank ordering of ratings had little predictive value, the cumulative share of defaulting corporate entities and the cumulative share of all entities at each rating would be nearly the same, producing a Gini ratio of zero (see charts 11-13). The quick deterioration of Gini ratios also reflects issuers' vulnerability to a loss of confidence, even among highly rated entities (as also shown in the path to default in chart 3). Among the three financial services sectors, insurance companies exhibit Gini ratios that are lower over the three-year horizon and longer, which reflects, in part, the four insurance companies that had previously been rated 'AAA' and eventually defaulted.

Appendix I: Detailed Default And Transition Statistics By Financial Services Sector

Bank rating action trends and ratings performance

Table 17

Table 18

Table 19

Table 20

Table 21

Table 22

Table 23

Table 24

Nonbank financial institutions rating action trends and ratings performance

Table 25

Table 26

Table 27

Table 28

Table 29

Table 30

Table 31

Table 32

Insurance rating action trends and ratings performance

Table 33

Table 34

Table 35

Table 36

Table 37

Table 38

Table 39

Table 40

Appendix II: Methodology And Definitions

This long-term corporate default and rating transition study uses the CreditPro database of long-term local currency issuer credit ratings. The analysis excludes public information ("pi") ratings and ratings based on the guarantee of another company or government entity. We also do not include short-term issuer ratings. S&P Global Ratings does not require all issuers with rated debt to have an issuer credit rating. Therefore, if an issuer has rated debt but not an issuer credit rating, we assign a proxy rating so that the CreditPro corporate dataset accurately represents the complete universe of ratings. The local currency senior unsecured rating is the preferred debt-level rating used for the proxy because this rating is usually consistent with the issuer credit rating. In a small number of cases, we use the subordinated debt rating or the senior secured rating as the proxy.

An S&P Global Ratings issuer credit rating is a forward-looking opinion about an obligor's overall creditworthiness. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation because it does not take into account the nature and provisions of any single obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. Counterparty credit ratings, corporate credit ratings, and sovereign credit ratings are all forms of issuer credit ratings. Issuer credit ratings can be either long-term or short-term.

Our ongoing enhancement of the database used to generate this study could lead to outcomes that differ to some degree from those reported in previous studies. However, this poses no continuity problem because each study reports statistics back to Dec. 31, 1980. Therefore, each is self-contained and effectively supersedes all previous versions.

Issuers included in this study

This study analyzes the rating histories of 5,423 financial services companies that S&P Global Ratings rated as of Dec. 31, 1980, or that were first rated between that date and Dec. 31, 2020. These include banks, nonbank financial institutions, and insurance companies around the world with long-term local currency ratings. Structured finance vehicles, public-sector issuers, and sovereign issuers are the subjects of separate default and transition studies, and we exclude them from this study.

To avoid overcounting, we exclude subsidiaries with debt that is fully guaranteed by a parent or with default risk that is considered identical to that of a parent. The latter are companies with obligations that are not legally guaranteed by a parent but that have operating or financing activities that are so inextricably entwined with those of the parent that it would be impossible to imagine the default of one and not the other. At times, however, some of these subsidiaries might not yet have been covered by a parent's guarantee, or the relationship that combines the default risk of parent and subsidiary might have come to an end or might not have begun. We included such subsidiaries for the period during which they had a distinct and separate risk of default.

Issuers with withdrawn ratings

S&P Global Ratings withdraws ratings when an entity's entire debt is paid off or when the program or programs rated are terminated and the relevant debt extinguished. For the purposes of this study, a corporate rating may also be withdrawn as a result of mergers and acquisitions. Others are withdrawn because of a lack of cooperation, particularly when a company is experiencing financial difficulties and refuses to provide all the information needed to continue surveillance on the ratings, or at the entity's request.

Definition of default

An obligor rated 'SD' (selective default) or 'D' (default) is in default on one or more of its financial obligations, including rated and unrated financial obligations, excluding hybrid instruments classified as regulatory capital or in nonpayment according to terms. An obligor is considered to be in default unless S&P Global Ratings believes that such payments will be made within five business days of the due date in the absence of a stated grace period, or within the earlier of the stated grace period or 30 calendar days.

A 'D' rating is assigned when S&P Global Ratings believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An 'SD' rating is assigned when S&P Global Ratings believes that the obligor has selectively defaulted on a specific issue or class of obligations but will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. S&P Global Ratings lowers its rating on an obligor to 'D' or 'SD' if the obligor is conducting a distressed exchange offer.

'R' (regulatory intervention) indicates that an obligor is under regulatory supervision owing to its financial condition. This does not necessarily indicate a default event, but during the period of regulatory supervision, the regulators may have the power to favor one class of obligations over others or to pay some obligations and not others. While the 'R' rating was in place during the many of the years covered in this study, it was removed from all ratings scales on July 5, 2019 (see "S&P Global Ratings Definitions," Jan. 5, 2021).

We deem 'D', 'SD', and 'R' issuer ratings to be defaults for the purposes of this study. A default is assumed to take place on the earliest of:

• The date S&P Global Ratings revised the rating(s) to 'D', 'SD', or 'R';
• The date a debt payment was missed;
• The date a distressed exchange offer was announced; or
• The date the debtor filed for, or was forced into, bankruptcy.

When an issuer defaults, it is not uncommon for S&P Global Ratings to subsequently withdraw the 'D' rating. For the purposes of this study, if an issuer defaults, we end its rating history at 'D'. If any defaulting entity reemerges from bankruptcy--or otherwise restructures its defaulted debt instruments, thereby reestablishing regular, timely payment of all its debts--we reenter this issuer into the database as a new entity. Its rating history after the default event is included in all calculations as entirely separate from its experience leading up to its earlier default.

Many practitioners use statistics from this default study to estimate the "probability of default" and "probability of rating transition." It is important to note that S&P Global Ratings' credit ratings do not imply a specific probability of default.

Regional definitions

Within this study, tables and charts often present specific geographic regions. Some countries can be included in multiple regions, and S&P Global Ratings does not have corporate ratings within every country. The regions covered in this study are:

U.S. and tax havens:   the U.S., Bermuda, and the Cayman Islands

Other developed:   Australia, Canada, Japan, and New Zealand

Europe:   Austria, Belgium, British Virgin Islands, Bulgaria, Channel Islands, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Moldova (Republic of), Monaco, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the U.K.

Emerging markets:   Angola, Argentina, Armenia, Aruba, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Bhutan, Bolivia, Bosnia and Herzegovina, Brazil, Brunei Darussalam, Cambodia, Chile, China, Colombia, Costa Rica, Curacao, Dominican Republic, Ecuador, Egypt, El Salvador, Fiji, Gabon, Georgia, Ghana, Grenada, Guatemala, Honduras, Hong Kong, India, Indonesia, Israel, Jamaica, Jordan, Kazakhstan, Kenya, Korea (Republic of), Kuwait, Lebanon, Liberia, Macao Special Administrative Region of China, Malaysia, Marshall Islands, Mauritius, Mexico, Mongolia, Morocco, Namibia, Netherlands Antilles, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Qatar, Russian Federation, Saudi Arabia, Singapore, South Africa, Sri Lanka, Syrian Arab Republic, Taiwan, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Turks and Caicos Islands, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Venezuela, Vietnam, and Yemen

Calculations

Static pool.   We conduct our default studies on the basis of groupings called static pools. For the purposes of this study, we form static pools by grouping issuers (by rating category, for example) at the beginning of each year, quarter, or month that the database covers. Each static pool is followed from that point forward. All companies included in the study are assigned to one or more static pools. When an issuer defaults, we assign that default back to all of the static pools to which the issuer belonged.

We use the static pools to avoid certain pitfalls in estimating default rates, ensuring that default rates account for rating migration and can be calculated across multiperiod time horizons. Some methods for calculating default and rating transition rates might charge defaults against only the initial rating on the issuer, ignoring more recent rating changes that supply more current information. Other methods may calculate default rates using only the most recent year's default and rating data, which may yield comparatively low default rates during periods of high rating activity because they ignore prior years' default activity.

The pools are static in the sense that their membership remains constant over time. Each static pool can be interpreted as a buy-and-hold portfolio. Because errors, if any, are corrected by every new update and because the criteria for inclusion or exclusion of companies in the default study are subject to minor revisions as time goes by, it is not possible to compare static pools across different studies. Therefore, every update revises results back to the same starting date of Dec. 31, 1980, so as to avoid continuity problems.

Entities that have had ratings withdrawn--that is, revised to not rated--are surveilled with the aim of capturing a potential default. Because static pools only include entities with active ratings as of the beginning date of a given pool, we exclude companies with withdrawn ratings, as well as those that have defaulted, from subsequent static pools. If the rating on an entity is withdrawn after the start date of a particular static pool and the entity subsequently defaults, we will include it in that static pool as a default and categorize it in the rating category of which it was a member at that time.

For instance, the 1981 static pool consists of all companies rated as of 12:00:01 a.m. on Jan. 1, 1981. Adding those companies first rated in 1981 to the surviving members of the 1981 static pool forms the 1982 static pool. All rating changes that took place are reflected in the newly formed 1982 static pool through the ratings on these entities as of 12:00:01 a.m. on Jan. 1, 1982. We used the same method to form static pools for 1983-2020. From Jan. 1, 1981, to Dec. 31, 2020, a total of 5,301 first-time-rated financial services entities were added to form new static pools, while we excluded 310 defaulting companies and 2,989 companies that were no longer rated.

Consider the following example: An issuer is originally rated 'BB' in mid-1986 and is downgraded to 'B' in 1988. This is followed by a rating withdrawal in 1990 and a default in 1993. We would include this hypothetical company in the 1987 and 1988 pools with the 'BB' rating, which was the rating on the issuer at the beginning of those years. Likewise, it would be included in the 1989 and 1990 pools with the 'B' rating. It would not be part of the 1986 pool because it was not rated as of the first day of that year, and it would not be included in any pool after the last day of 1990 because the rating had been withdrawn by then. Yet each of the four pools in which this company was included (1987-1990) would record its 1993 default at the appropriate time horizon.

Default rate calculation.   We calculated annual default rates for each static pool, first in units and later as percentages with respect to the number of issuers in each rating category. We combined these percentages to obtain cumulative default rates for the 40 years the study covers (see chart 10 and tables 13-15, 22-23, 30-31, and 38-39).

Issuer-weighted default rates.   All default rates that appear in this study are based on the number of issuers rather than the dollar amounts affected by defaults or rating changes. Although dollar amounts provide information about the portion of the market that is affected by defaults or rating changes, issuer-weighted averages are more useful measures of the performance of ratings.

Average cumulative default rate calculation.  The cumulative default rates in this study average the experience of all static pools by first calculating marginal default rates for each possible time horizon and for each static pool, weight-averaging the marginal default rates conditional on survival (survivors being nondefaulters), and accumulating the average conditional marginal default rates. We calculated conditional default rates by dividing the number of issuers in a static pool that default at a specific time horizon by the number of issuers that survived (did not default) to that point in time. Weights are based on the number of issuers in each static pool. Cumulative default rates are one minus the product of the proportion of survivors (nondefaulters).

Transition analysis

Transition rates compare issuer ratings at the beginning of a period with ratings at the end of the period. To compute one-year rating transition rates by rating category, we compared the rating on each entity at the end of a particular year with the rating at the beginning of the same year. An issuer that remained rated for more than one year was counted as many times as the number of years it was rated. For instance, an issuer continually rated from the middle of 1984 to the middle of 1991 would appear in the seven consecutive one-year transition matrices from 1985 to 1991. If the rating on the issuer was withdrawn in the middle of 1991, it would be included in the column representing transitions to not rated ("NR") in the 1991 transition matrix. Similarly, if it defaulted in the middle of 1991, it would be included in the column representing transitions to 'D' in the 1991 one-year transition matrix.

All 1981 static pool members still rated on Jan. 1, 2020, had 40 one-year transitions, while companies first rated on Jan. 1, 2020, had only one. Table 6 displays the summary of one-year transitions in the investment-grade and speculative-grade rating categories in 2020. Each one-year transition matrix displays all rating movements between letter categories from the beginning of the year through year-end. For each rating listed in the matrix's leftmost column, there are nine ratios listed in the rows, corresponding to the ratings from 'AAA' to 'D', plus an entry for "NR", (see table 12).

The only ratings considered in these calculations are those on entities at the beginning of each static pool and those at the end. All rating changes that occur in between are ignored. For example, if an entity was rated 'A' on Jan. 1, 2020 and was downgraded to 'BBB' in the middle of the year and then upgraded to 'A' later in the year (with no other subsequent rating changes), this entity would be included only in the percentage of issuers that began the year at 'A' and ended the year at 'A'. This also applies to transition matrices that span longer time horizons. If an issuer defaults or if the issuer rating is withdrawn in the middle of the year, then it would be considered rated 'D' or not rated as of Dec. 31 of that particular year.

Multiyear transitions.  Multiyear transitions were also calculated for periods of two up to 10 years. In this case, we compared the rating at the beginning of the multiyear period with the rating at the end. For example, three-year transition matrices were the result of comparing ratings at the beginning of the years 1981-2018 with the ratings at the end of the years 1983-2020. Otherwise, our approach was identical to that used for single-year transitions.

We calculated average transition matrices on the basis of the multiyear matrices just described. These average matrices are a true summary, the ratios of which represent the historical incidence of the ratings listed in the first column changing to the ones listed in the top row over the course of the multiyear period (see tables 10, 19, 27, and 35). Transition matrices that present averages over multiple time horizons are also calculated as issuer-weighted averages.

Rating modifiers

We use rating modifiers (plus and minus signs) to calculate upgrade and downgrade percentages, as well as the magnitude of rating changes, throughout this study. However, some transition tables may use full rating categories for practical reasons. In other words, the use of a rating category suggests that transitions to, for example, 'AA-' from 'AA' or to 'BBB-' from 'BBB+' are not considered to be rating transitions because the rating remained within the rating category.

Standard deviations

Many of the tables and charts in this study display averages of default rates, transition rates, and Gini ratios. Often these are issuer-weighted averages. Prior studies have shown that fluctuations in default rates and transitions can vary greatly depending on many circumstances specific to particular time frames, industries, and geographic regions. As a supplement to many of the averages and time series presented in this study, standard deviations are also shown to provide a gauge of the dispersion of data behind these averages.

Time sample

This update limits the reporting of default rates to the 15-year time horizon. However, the data were gathered for 40 years, and all calculations are based on the rating experience of that period. In addition, average default statistics become less reliable at longer time horizons as the sample size becomes smaller and the cyclical nature of default rates has a bigger effect on averages.

For a detailed explanation, please refer to Appendix I of "2020 Annual Global Corporate Default And Rating Transition Study," published April 7, 2021.

Appendix III: Gini Methodology

To measure relative ratings performance, we utilize the Lorenz curve as a graphical representation of the proportionality of a distribution, and we summarize this via the Gini coefficient. For this study, the Lorenz curve is plotted with the x-axis showing the cumulative share of issuers, arranged by rating, while the y-axis represents the cumulative share of defaulters, also arranged by rating. For both axes of the Lorenz curve, the observations are ordered from the low end of the ratings scale ('CCC'/'C') to the high end ('AAA').

As an example, if 'CCC'/'C' rated entities made up 10% of the total population of issuers at the start of the time frame examined (x-axis) and 50% of the defaulters (y-axis), then the coordinate (10, 50) would be the first point on the curve. If S&P Global Ratings' corporate ratings only randomly approximated default risk, the Lorenz curve would fall along the diagonal. Its Gini coefficient--which is a summary statistic of the Lorenz curve--would thus be zero. If corporate ratings were perfectly rank ordered so that all defaults occurred only among the lowest-rated entities, the curve would capture all of the area above the diagonal on the graph (the ideal curve), and its Gini coefficient would be 1 (see chart 24).

The procedure for calculating the Gini coefficients is illustrated in chart 24: Area B is bounded by the random curve and the Lorenz curve, while area A is bounded by the Lorenz curve and the ideal curve. The Gini coefficient is defined as area B divided by the total of area A plus area B. In other words, the Gini coefficient captures the extent to which actual ratings accuracy diverges from the random scenario and aspires to the ideal scenario.

Appendix IV: Defaults In Profile

In 2020, five financial services companies that had been publicly rated by S&P Global Ratings defaulted on US$1.2 billion of debt. This appendix provides summaries of the events leading up to each publicly rated default and, in some cases, events following the default. We also list the defaulting instruments rated by S&P Global Ratings for each company.

Grain Insurance Co. JSC

On March 20, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Kazakhstan-based Grain Insurance Co. JSC to 'D' from 'B' after the issuer missed payments to the counterparties. In addition, on March 13, 2020, the issuer's license was suspended by the Kazakh insurance regulator due to breach of the regulatory ratios.

On July 9, 2020, S&P Global Ratings withdrew its issuer credit rating at the company's request.

Table 41

FE Investments Ltd.

On April 6, 2020, S&P Global Ratings lowered its long-term issuer credit rating on New Zealand-based nonbank financier FE Investments Ltd. to 'D' from 'CCC'. The trustee placed the issuer into receivership (with Calibre Partners--previously KordaMentha NZ--as receivers) because the issuer was unable to raise capital to maintain the regulatory minimum. As a consequence of the receivership, all payments of principal and interest to deposit holders were suspended. The issuer was facing a rise in additional loan loss provision, which was attributed to the large nonperforming loans.

On June 4, 2020, we withdrew the ratings on the issuer because of insufficient information to continue the surveillance of the ratings.

Table 42

Banco Hipotecario S.A.

• US$350 million of 9.75% notes due Nov. 30, 2020
• US$78.336 million of 9.75% senior unsecured notes due Oct. 14, 2025
• ARS6.3 billion of senior unsecured notes due Nov. 7, 2022
• ARS3.75 billion of senior unsecured notes due Feb. 15, 2021
• ARS2.9 billion of senior unsecured notes due Feb. 11, 2022
• ARS390.5 million of senior unsecured notes due Aug. 11, 2021

On Oct. 14, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Argentina-based Banco Hipotecario S.A. to 'SD' from 'CC' after the issuer announced that 46.7% of the bondholders of its outstanding US$279.8 million of series 29 notes due on Nov. 30, 2020, accepted the exchange offer originally launched in early September. The transaction, which was settled on Oct. 14, was considered distressed, as opposed to opportunistic.

On Oct. 15, 2020, S&P Global Ratings raised the issuer credit rating to 'CCC+' from 'SD' because the issuer had enough liquidity to pay the remainder of the bond's maturity.

On Dec. 16, 2020, S&P Global Ratings withdrew the issuer credit ratings at the issuer's request.

Table 43

Corp. Group Banking S.A.

• US$500 million of 6.75% notes due March 15, 2023

On Oct. 16, 2020 S&P Global Ratings lowered its long-term issuer credit rating on Chile-based bank holding company Corp Group Banking S.A. to 'D' from 'CC' after the issuer missed its US$16.9 million semiannual interest payment on its bond. The 30-day grace period ended on Oct. 15, 2020.

Table 44

Populus Financial Group Inc.

• US$350 million of 12.00% notes due Dec. 15, 2022

On Dec. 18, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Texas-based financial products and services provider Populus Financial Group Inc. to 'SD' from 'CC'. The company finalized a tender offer to repurchase $213 million of its outstanding $255 million of 12% senior secured notes due 2022. The transaction was viewed as distressed because the remaining US$42 million will now become subordinated, while the noteholders who agreed to the exchange will receive US$850 per US$1,000 principal amount.

On Dec. 22, 2020, S&P Global Ratings raised its issuer credit rating to 'CCC+' from 'SD'. To facilitate the proposed exchange, the issuer entered a new term loan facility of US$190 million maturing in 2024.

Later, on Jan. 19, 2021, we withdrew our issuer credit ratings on the company at its request.

Table 45

Related Criteria

• S&P Global Ratings Definitions, Jan. 5, 2021
• Methodology And Assumptions For Analyzing Bond Insurance Capital Adequacy, July 1, 2019
• Insurers Rating Methodology, July 1, 2019
• Issue Credit Rating Methodology For Nonbank Financial Institutions And Nonbank Financial Services Companies, Dec. 9, 2014
• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011

Related Research

• 2020 Annual Global Corporate Default And Rating Transition Study, April 7, 2021
• What May Cause Insurance Companies To Fail--And How This Influences Our Criteria, June 13, 2013