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How to Assess the Financial Strength of Insurance Companies

Four major independent agencies – A.M. Best, Fitch, Moody’s and Standard & Poor’s -rate the financial strength of insurance companies. Each has its own rating scale, its own analysis standards, a group of insurance companies and subscribers. Each agency uses numbers or letters, with plusses and minuses to indicate discrete variations in rating and qualifiers.

It is wise to seek an insurer’s rating from more than one agency before judging whether to buy or keep a policy from that company. It’s also prudent to check annually on the company you work with or are considering.

Some points for using the ratings:

  • Don’t rely on your agent or insurance company to tell you how strong the insurer is. Often the highest rating is promoted and a lower rating from another insurer ignored, or to select the most positive remarks from a rating agency’s report.
  • To use the ratings from more than one independent agency, you need to understand that each agency’s assigned rating varies. For example, an A+ from A.M. Best is the next-to-top rating of its 15 categories, but an A+ from Fitch or S&P is their 5th-highest rating (out of 24 categories for Fitch, and out of 19 categories for S&P). Moreover, Moody’s doesn’t have an A+ rating.

The most commonly used rating agency for insurance is A.M. Best & Company [“Best’s”]. Generally Bests is the most recognized by policyholders and their clients and a rating of A or better is considered safe.

However, Best’s also qualifies assigned rating with an Outlook comment which gives an indication of where Bests believes the insurer’s rating will develop in the immediate future.

Outlook Definition
Positive Indicates possible rating upgrade due to favorable financial/market trends relative to the current rating level.
Stable Indicates low likelihood of a rating change due to stable financial/market trends.
Negative Indicates possible rating downgrade due to unfavorable financial/market trends relative to the current rating level.

So if an insurer has a Best’s rating of A- (the lowest A rating) coupled with a negative Outlook there is a chance that the insurer may be downgraded in the near future to a B+ or B++. This is a problem as this lower rating may be unacceptable security for any contracts or engagement letters with clients or customers.

Also, it is wise to do a quick internet search for latest news about the insurer or the insurer’s parent company. This will reveal current issues about the insurer which may not yet been calculated in the current rating.

A careful review of an insurer’s financial rating will give you peace of mind and may avoid problems of a future downgrade.

There are two other rating agencies that evaluate insurance company’s financial health.

Weiss Ratings – a long establish rating agency that is recognized as a most conservative company.

Demotech – less recognized and sometimes used by insurers that may have withdrawn from Best’s or do not have a current rating.

Ratings Agency Contact Information

All of the ratings agencies can be found on the Web, or reached by phone.

Agency Web site Address Phone number
A.M. Best Company Ambest Rd.
Oldwick, NJ 08858
Fitch Ratings 1 State Street Plaza
New York, NY 10004
Moody’s Investor Services 99 Church Street
New York, NY 10007
Standard & Poor’s Insurance Ratings Services 55 Water Street
New York, NY 10004
Weiss Ratings 4400 Northcrorp Pkwy
Palm Beach Gardens, FL 33410
Demotech 2715 Tuller Pkwy
Dublin, Ohio 43107

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