Understanding Carrier Financial Ratings

When choosing an insurance carrier to cover your They issue a number of credit-related ratings, including business, there are many factors to consider. Price and the Financial Strength Rating (FSR). The FSR is essentially customer service are often at the top of this list—no one the opinion of AM Best and represents the insurance wants to overpay for coverage, and you want your claims carrier’s ability to meet policy and contractual paid out in a fair and timely manner. obligations. AM Best has the following designations for its FSR: Another piece to this puzzle that bears consideration is the financial strength of the insurance carrier, or their  Superior: A++, A+ ability to pay out claims, if necessary. Many insurance  Excellent: A, A- buyers take this aspect for granted. Widespread disasters, such as hurricanes or wildfires, can test an insurance  Good: B++, B+ carrier’s financial strength. In fact, insurance carriers with  Fair: B, B- poor financial strength can go bankrupt as a result of these disasters.  Marginal: C++, C+  Weak: C, C- There are a number of rating agencies out there, and each one has their own criteria and rating system. In  Poor: D other words, ratings may not be consistent across all It should be noted that E and F are designations, not agencies, and an A+ rating may be high for one agency, ratings. These letters indicate the insurance carrier has but not as impressive for another. While each rating been publicly placed into conservation/rehabilitation (E) agency uses its own criteria, they will commonly evaluate or liquidation (F). a carrier’s financial performance, management performance, strategy, market size and vulnerability to In addition to the rating, AM Best will also provide an disasters, among many others. opinion outlook. This opinion generally looks ahead about three years and is either positive, negative or stable: AM Best AM Best is one of the best-known independent credit  A positive outlook shows that the insurance rating agencies for insurance companies. They have been carrier is experiencing favorable trends. If these in business since 1899 and operate not just in the United trends continue, the rating could be upgraded. States, but internationally as well. Insurance is the only  A negative outlook shows that the insurance industry they provide ratings for, and you will often see carrier is experiencing unfavorable trends. If insurance carriers tout their AM Best rating in marketing these trends continue, they could be materials.

Provided by Connor & Gallagher OneSource This Coverage Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2019 Zywave, Inc. All rights reserved. Understanding Insurance Carrier Financial Ratings

downgraded. investment-grade, while anything rated Ba1 or below is considered speculative or non-investment-grade.  A stable outlook shows the insurance carrier is experiencing stable conditions and the rating is Standard & Poor’s unlikely to change. Standard & Poor’s, which was founded in 1860, is the Ratings are determined initially and updated periodically. third and oldest of the big three and looks at all The rating can be changed, withdrawn or suspended at industries. Their ratings are as follows: AAA, AA+, AA, AA-, any time. Ratings can be found by subscribing to AM Best, A+, A, BBB, BB, B, CCC, CC, C, R, SD and D. Anything but most insurance carriers will have their rating on their Standard & Poor’s-rated BBB and above is considered website, marketing materials or annual reports. investment-grade, while anything rated BB and below is speculative or non-investment-grade. Big Three Rating Agencies Because these rating agencies are all making an opinion, AM Best is one of the better-known rating agencies for it is worth looking into other agencies, especially because insurance carriers, but is by no means the only one or the they often disagree. However, it is important to note that, most accurate. The big three agencies, in no while some of the scales may use the same rating, they particular order, are (Fitch), Moody’s and don’t necessarily mean the same thing. Take a flat A Standard & Poor’s. These agencies also provide credit rating, for example. For AM Best, this is their third- ratings of insurance carriers. highest rating, but it is just the sixth-highest for Fitch and Fitch Standard & Poor’s. Fitch is one of the traditional big three raters. The big three look not just at the insurance industry, but all Evaluating Insurers industries. Fitch has been in business since 1914, and its Financial strength ratings are an important piece of your rating system is as follows: AAA, AA+, AA, AA-, A+, A, A, decision-making process when choosing a carrier; BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, however, it is by no means the only factor to consider. CC, C and D. Consult with your insurance broker to choose the best carrier in which to trust your business to. Please note that this is not a like-to-like comparison with AM Best, as criteria is going to differ. Under the Fitch rating system, anything rated BBB and up is considered investment-grade, while anything rated BB or below is non-investment-grade.

Moody’s Moody’s is another of the big three for all industries. They were founded in 1909, and their rating system is as follows: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca and C. Anything Moddy’s-rated Baa3 and up is considered