By Michael Loney

May 28 - (The Insurer) - S&P Global Ratings has lowered its financial strength and counterparty credit ratings on USAA and its core insurance subsidiaries to AA from AA-plus, which follows Moody’s downgrading the military community-focused insurer earlier this month.

S&P cited underperformance of USAA’s banking division and the compliance issues cited by the Office of the Comptroller of the Currency.

The rating agency said that San Antonio-based USAA continues to face challenges following the OCC’s issue of a consent order against USAA Federal Savings Bank $(FSB)$ in December last year, which mandates the bank to address various deficiencies.

“While the company’s property/casualty operating margin improved, the remediation efforts with the OCC have strained the performance of its banking business, weakening the overall earnings diversity,” the rating agency said.

The outlook on the ratings is stable.

S&P also lowered its long-term counterparty credit rating on the intermediate holding company, USAA Capital Corp, to AA-minus from AA, with a negative outlook.

The rating agency said that the downgrades reflects USAA’s weakened earnings diversity due to the underperformance of FSB, and the compliance issues cited by the OCC.

“As a result, we revised our view of the company’s competitive position to very strong from excellent to reflect our view that the company’s resilience to adverse operating conditions has deteriorated compared with peers at the AA-plus rating level,” S&P said.

The rating agency said that until 2020, USAA’s banking subsidiary reliably contributed around $1 billion to the group’s consolidated GAAP pretax income, helping to mitigate the volatility in property casualty underwriting results.

But from 2020 to 2024, FSB generated an average pretax loss of $236 million.

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

The rating agency said that USAA is distinguished by its commitment serving the military community and their families, and is one of the largest insurers of personal auto and homes in the U.S.

Its P/C operation reported a pretax income of $4.5 billion in 2024 and $912 million in the first quarter of 2025.

S&P expects USAA’s insurance operations to improve as the cumulative rate increases of 32% on auto and 22% on homeowners achieved between 2022 and 2024 fully earn in.

“Additionally, we anticipate that the consolidated premium growth will rise amid strong retention and pricing, coupled with an increase in membership growth,” it said.

S&P expects USAA for the 2025 to 2026 period to post a combined ratio between 93% and 95% and pretax earnings of $4.5 billion to $4.7 billion, as well as 7% premium growth.

The downgrade follows Moody’s on May 19 downgrading USAA’s insurance financial strength rating to Aa1 from Aaa, and USAA Capital Corporation's backed senior unsecured debt rating to Aa2 from Aa1, with negative outlooks.

That action follows the May 16 Moody’s downgrade of the U.S. government’s long-term issuer and senior unsecured ratings to Aa1 from Aaa.

“The downgrade of USAA's ratings reflects linkages between USAA's credit profile and of the credit profile of the US Government,” Moody’s said.

“The USAA downgrade also reflects prolonged and costly regulatory and compliance issues in its banking business, and the challenge of enterprise risk management across its diversified business lines,” it added.