Insurance Rating Companies Explained

Each Firm's Rating System is Unique

Updated on September 13, 2022

Fact checked by J.R. Duren

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One factor you should consider when selecting an insurance company is the insurer's financial strength. Analyzing an insurer's financial condition requires a considerable amount of number-crunching. Fortunately, financial ratings firms have done much of the work for you. There are five main companies that publish financial ratings of insurance companies: Fitch Ratings, A.M. Best, Standard and Poor's, Moody's, and the Kroll Bond Rating Agency.

Key Takeaways

Generally speaking, an insurance ratings agency's rating for a life insurer is based on the insurer's ability to meet its financial obligations in good and bad economic conditions.
There are five main ratings agencies, and each agency's computations and ratings are slightly different.
In general, companies with an "A" grade are financially strong and likely to meet their obligations if economic conditions worsen.
An insurance company's financial rating is not a guarantee of future performance; it's a projection.

Insurance Rating Company Rating Systems

Each of the five companies has developed a rating system to describe insurers' financial condition. All of the systems use letters of the alphabet (Moody's also uses numbers). The ratings generally range from "poor" or "distressed" to "excellent" or "superior."

Rating organizations consider both qualitative and quantitative factors when evaluating an insurer. For example, KBRA uses all the following to calculate an insurer's financial strength rating:

A quantitative assessment using KBRA's long-term credit scale and stress testing. KBRA considers factors such as the insurer's loss reserves, ceded reinsurance leverage, and combined ratio.
A quantitative score based on factors like the insurer's balance sheet, company profile, and risk management strategies
An external considerations score that indicates if a parent company may be a potential source of credit. Alternatively, it may suggest that there are outside risks that may negatively impact the firm.
A potential rating constraint due to currency transfer risk. An insurer that operates in an emerging market may be unable to raise foreign currency to meet financial obligations due to political or economic constraints.

How Insurance Rating Companies' Ratings Differ

While the companies use similar data to calculate their ratings, no two systems are alike. For one thing, the companies use different scales:

A.M. Best's system consists of 13 ratings that range from A++ to D.
S&P's system includes 10 categories from AAA to D.
Moody's system also includes 21 categories but it uses a combination of capital letters, lower-case letters, and numbers (from Aaa to C).
Fitch's scale has 11 ratings ranging from AAA to D.
KBRA uses 10 ratings: AAA to D.

The rating companies also differ in the methods they use to calculate insurer ratings. Two companies may consider the same factors, such as the macroeconomic environment, but one firm may attach more weight to it than another.

Note

Because rating systems vary, it's a good idea to consider ratings from several companies when evaluating an insurer.

Comparison of Ratings

The top six ratings used by each of the five companies to evaluate insurers' financial strength are listed in the table below. The fact that ratings appear in the same row does not mean they are equivalent to each other. That is, S&P's AA rating may differ somewhat from Fitch's or KBRA's AA rating.

Ratings of Insurers' Financial Strength
Fitch	A.M. Best	S&P	KBRA	Moody's
AAA	A++, A+	AAA	AAA	Aaa
Exceptionally strong capacity to pay financial commitments	Superior ability to meet ongoing obligations	Extremely strong financial security characteristics. Highest S&P rating	Very highest quality. Almost no risk of default	Highest quality, minimal risk.
AA	Not Applicable	AA	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	Very high quality. Highly likely to meet financial obligations	High quality and very low risk
A	A, A-	A	A	A
Strong capacity to pay financial commitment	Excellent capacity to meet financial commitments	Strong financial security characteristics but could be susceptible to changes in economic conditions	High quality. Likely to meet financial obligations even during difficult economic times.	Slightly below high quality, low risk
BBB	B++, B+	BBB	BBB	Baa
Adequate capacity to pay financial commitments	Food ability to meet financial obligations	Adequate ability to meet financial needs but could be more vulnerable to negative economic conditions	Medium quality. At risk for some credit loss during adverse economic conditions.	Medium quality, moderate risk
BB	B, B-	BB	BB	Ba
Elevated vulnerability to default risk but has flexibility to service financial commitments	Fair ability to meet financial commitments	Adequate in the short-term but likely to deal with major issues in the future	Low quality with moderate risk of loss	Questionable financial security, substantial risk
B	C++, C+	B	B	B
Significant risk of default with limited margin of safety	Marginal ability to meet their ongoing insurance obligations.	Can meet financial commitments but more vulnerable than BBB and BB companies	Very low quality and high risk	Questionable financial security, high risk

Rating 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.

Note

A credit rating is based on assumptions and is not a guarantee of an insurer's future performance. The assumptions underlying a credit rating 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.

Frequently Asked Questions (FAQs)

How do I find an insurance company rating?

Generally speaking, you can find an insurance company's rating two ways: through a search on the ratings agency's website (you may have to sign up for an account), or the insurance company may list its rating on its website.

What are the top five insurance rating agencies?

In general, the top five insurance rating agencies are A.M. Best, Fitch, Moody's, S&P, and KBRA.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

Kroll Bond Rating Agency. "Long-Term Credit Ratings."
Kroll Bond Rating Agency. "Global Insurer & Insurance Holding Company Rating Methodology," Page 15.
A.M. Best. "Guide to Best's Financial Strength Ratings—(FSR)."
S&P Global Ratings. "Intro to Credit Ratings."
Moody's. "Rating Scale and Definition."
Fitch Ratings. "Ratings Definitions."