Insurance Company Ratings

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One factor you are likely to consider when selecting an insurance company is the insurer's financial ratings. There are four major financial services companies that provide ratings of U.S. insurance companies. These include Fitch Ratings, A.M. Best, Standard and Poor's, and Moody's. Three of the companies (Fitch, S&P, and Moody's) provide financial ratings for both insurers and other types of businesses. A.M. Best rates insurance companies only.

Rating Systems

Each of the four companies has developed a rating system that utilizes one or more letters of the alphabet to describe an insurer's financial condition. The ratings generally range from "excellent" or "superior" to "poor" or "distressed." While the companies use similar data to calculate their ratings, no two systems are alike.

Rating organizations consider both qualitative and quantitative factors when rating an insurer. Quantitative factors include the insurer's income statement, its balance sheet, and its loss and expense ratios. Qualitative factors might include the company's philosophy, the quality of its management, and its appetite for risk.

The ratings firms produce multiple ratings for each insurer. One rating might apply to an insurer's financial strength while another reflects its ability to pay long-term debt. The four companies' financial strength ratings are shown in the table below. Ratings below B (or C+) have been omitted.

The fact that ratings appear in the same row does not mean that they are equivalent to each other.  For instance, S&P's AA rating may differ somewhat from Moody's Aa rating. Because the rating systems vary, it's a good idea to consider ratings from several sources when evaluating an insurer.

Ratings of Insurers' Financial Strength

AAA A++, A+ AAA Aaa
Exceptionally strong capacity to pay financial commitments Superior ability to meet ongoing obligations Extremely strong financial security characteristics. Highest S&P rating Exceptional financial security. Fundamentally strong position.
AA Not Applicable AA Aa
Very strong capacity to pay financial commitments Companies rated A+ are one "notch" lower than those rated A++ Very strong financial security characteristics Excellent financial security.
A A, A- A A
Strong capacity to pay financial commitment Very strong capacity to meet financial commitments

Strong financial security characteristics

Good financial security.
BBB B++, B+ BBB Baa
Adequate capacity to pay financial commitments Good ability to meet financial obligations Good financial security characteristics Adequate financial security
BB B, B- BB Ba
Elevated vulnerability to default risk but has flexibility to service financial commitments Fair ability to meet financial commitments Marginal financial security characteristics Questionable financial security
B C++, C+ B B

Material risk of default with limited margin of safety

Marginal ability to meet their ongoing insurance obligations. Weak financial security characteristics Poor financial security

Ratings Limitations

The financial strength ratings are "forward-looking." That is, they are predictions of insurers' future ability to meet their financial obligations. An insurer's primary obligation is to make claim payments to (or on behalf of) policyholders. Insurers may also have contractual obligations to reinsurers and other parties.

A credit rating is not a guarantee of an insurer's future performance. Credit rating firms assign ratings to insurers based on certain assumptions. Those assumptions may prove to be wrong.

The classifications used by rating firms are fairly broad, so each classification is likely to include a large number of insurers. For instance, hundreds of insurance companies may qualify for S&P's AA rating. While these insurers have similarities, they are not identical credit risks.

Insurance company ratings reflect insurers' financial ability to pay claims. They are not a measure of the quality of insurers' claim handling services.The fact that an insurer can pay claims does not mean it will do so efficiently or effectively.