Life Insurance Rating Scale: Am Best's Methodology Explained

AM Best is a credit rating agency that assesses the financial strength of insurance companies. It is the only rating agency that specializes solely in the insurance industry. AM Best's ratings can help consumers understand which policies best meet their needs. The agency uses a letter-grading system, with six secure ratings ranging from A++ to B+ and six vulnerable ratings from B to F. These ratings are based on a company's ability to meet its ongoing obligations to policyholders. AM Best also offers additional ratings, including Issuer Credit Ratings, Issue Credit Ratings, and National Scale Ratings, to provide a comprehensive evaluation of a company's financial health.

AM Best's Financial Strength Rating

AM Best's FSR scale includes six "Secure" ratings: A++, A+ (Superior), A, A- (Excellent), and B++ and B+ (Very Good). These ratings indicate that a company has a good to superior ability to meet its ongoing obligations to policyholders. The "Secure" ratings provide valuable insight into the financial stability and reliability of insurance companies.

In contrast, the scale also includes six "Vulnerable" ratings. These ratings suggest that a company may be financially vulnerable and at risk of being unable to meet its current obligations. The "Vulnerable" ratings range from B and B- (Fair) to F (In Liquidation), indicating a company's financial vulnerability to adverse changes and its ability to meet its financial commitments.

AM Best's FSRs are developed through a focused ratings methodology that considers multiple qualitative and quantitative factors. The assessment includes a review of balance sheet strength, operating performance, and enterprise risk management (ERM). Additionally, AM Best conducts annual rating meetings with insurance companies to discuss growth strategies, earnings, and future plans. This interactive rating process ensures a comprehensive evaluation of an insurer's financial strength and ability to meet its obligations.

AM Best's FSRs are recognised and trusted in the industry. The company has been assessing insurance companies since 1899 and is designated as a nationally recognised rating company by the U.S. Securities and Exchange Commission (SEC) and the National Association of Insurance Commissioners (NAIC). AM Best's FSRs provide valuable insights for consumers, helping them make informed decisions when choosing an insurance company that can reliably meet its financial commitments.

AM Best's rating scale

AM Best is a credit rating agency that has been reviewing insurance companies since 1899. It is the oldest and largest credit agency in the world and is recognised by the U.S. Securities and Exchange Commission (SEC) as an official credit rating provider. AM Best issues grades annually to illustrate an insurer's ability to pay out on claims and meet other financial obligations. These grades are relevant to all kinds of insurance, including life insurance.

AM Best rates insurance companies on their financial health by assigning them letter grades ranging from A+ to D. Each grade may also have a notch (or an additional "+") to indicate its strength within that grade. For example, an A+ company with an outstanding ability to meet its obligations would be categorised as A++.

The following table shows the differences between each rating:

• Superior: Rating: A+, Notches: A++
• Excellent: Rating: A, Notches: A-
• Good: Rating: B+, Notches: B++
• Fair: Rating: B, Notches: B-
• Marginal: Rating: C+, Notches: C++
• Weak: Rating: C, Notches: C-

An "Under Review" modifier, or "U", may be added to a company's grade if there is a potential for a near-term change to its score, usually within the next six months. This marker can imply positive or negative results.

AM Best's ratings are based on a carrier's historical ability to pay out claims, the amount of debt a carrier holds, and the amount of other financial obligations. AM Best completes this analysis by looking at the balance sheet, operating performance, business profile, and debt obligations of the insurance company.

AM Best's ratings are determined by a variety of factors, mainly focused on risk and financial management. All information is then compiled to assign a letter grade for creditworthiness and financial stability.

How AM Best develops its ratings

AM Best is a credit rating agency that assesses the financial strength of insurance companies. The company has been in operation since 1899 and is the only rating agency that focuses solely on the insurance industry. AM Best's ratings are designed to provide an objective assessment of a company's performance, helping consumers understand which policies best meet their needs. The company's ratings are recognised by the U.S. Securities and Exchange Commission (SEC) and the National Association of Insurance Commissioners (NAIC).

AM Best's ratings are based on a combination of qualitative and quantitative factors. The core of the quantitative analysis includes a review of a company's balance sheet strength, operating performance, and enterprise risk management (ERM). In addition, AM Best conducts a qualitative assessment through annual rating meetings with each insurance company. These meetings allow them to discuss growth strategies, earnings, and future plans with the company's senior management. This interactive rating process ensures that AM Best's ratings are well-rounded and accurate.

AM Best's ratings scale ranges from A+ to D, with each rating potentially having a notch to indicate the company's strength within that category. For example, an A+ company with exceptional financial strength would be categorised as A++. These notches allow for a more nuanced assessment of a company's financial health.

AM Best also offers additional ratings, such as Issuer Credit Ratings (ICR), Issue Credit Ratings (IR), and National Scale Ratings (NSR), which provide further insights into a company's financial obligations and creditworthiness.

The company reviews each insurer's financial strength annually and conducts checkpoints throughout the year to ensure that the current rating aligns with the company's future projections. This includes reviewing financial statements every six months and holding quarterly earnings calls. AM Best also stays in close communication with insurers to account for any changes in management, new product launches, or other significant developments.

Other AM Best ratings

AM Best offers three additional ratings beyond its financial strength ratings: Issuer Credit Ratings (ICR), Issue Credit Ratings (IR), and National Scale Ratings (NSR).

Issuer Credit Ratings (ICR)

These ratings assess a company's ability to meet its short-term and long-term financial obligations. In other words, they evaluate the likelihood of a company being able to pay off its debts.

Issue Credit Ratings (IR)

IRs assess an insurer's ability to meet the terms of its financial obligations. This includes the insurer's ability to pay out on insurance claims.

National Scale Ratings (NSR)

NSRs evaluate an insurer's creditworthiness within a specific location or country. NSRs are useful for comparing companies within the same country.

How to use AM Best ratings

AM Best is a credit rating agency that assesses the financial strength of insurance companies. It is the only rating agency that specializes solely in the insurance industry. Its ratings are a useful indicator of an insurer's ability to meet its financial obligations and pay out claims. Here's how to use AM Best's ratings:

Find the Rating on the AM Best Website

Go to the AM Best website and use the search box for "Rating Services" to look up the full name of the company you're interested in. This will bring up the company's current financial strength rating, along with ratings from previous years and other information. While in-depth reports may be available for a charge, financial strength ratings are usually free.

Understand the Rating Scale

AM Best's financial strength ratings range from A+ to D, with each rating possibly featuring an additional "+" or "-" to indicate its relative strength within that category. For example, an A+ rating with an additional "+" would indicate impeccable financial strength in the A+ category. The ratings can be grouped into secure and vulnerable categories. The secure ratings range from A++ to B+, while the vulnerable ratings range from B to S, with the latter indicating a suspended rating.

Look Beyond the Letter

It's important not to focus solely on the letter grade of the rating. Remember that a financial strength rating is a benchmark to compare insurance companies against their peers. There may be other factors at play that influence the rating, such as geographic concentration or diversification.

Review Ratings Trends

AM Best provides ratings and commentary for up to five years. Examining these trends can give you valuable insights into a company's stability over time. A consistent rating over several years can inspire more confidence in the company's performance and financial health.

Compare with Other Rating Agencies

It's a good idea to consult ratings from other credit rating agencies, such as Moody's or Standard & Poor's. Since different agencies use their own methodologies, there may be discrepancies in the ratings of specific companies. By considering multiple sources, you can gain a more comprehensive understanding of an insurer's financial standing.

Consider Other AM Best Ratings

In addition to financial strength ratings, AM Best offers Issuer Credit Ratings (ICR), Issue Credit Ratings (IR), and National Scale Ratings (NSR). ICRs assess a company's ability to meet short-term and long-term financial obligations. IRs evaluate an insurer's ability to meet the terms of its financial obligations. NSRs assess an insurer's creditworthiness within a specific location, allowing for comparisons between companies within the same country.

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