When choosing an insurance provider, understanding their financial stability is crucial. A.M. Best, a credit rating agency specializing in the insurance industry since 1899, offers valuable insights through its A.M. Best’s Key Rating Guide. This guide provides ratings that indicate an insurer’s ability to meet its financial obligations, including paying out claims. CNBC Select often uses A.M. Best ratings to help determine the best insurance companies across various categories.
What is A.M. Best?
A.M. Best is an independent credit rating agency that assesses the financial strength of insurance companies. They analyze financial data and translate it into letter grades that are easily understood by consumers, investors, and industry professionals. This helps individuals make informed decisions when selecting an insurer.
A.M. Best reviews and rates over 16,000 insurance companies worldwide, ranging from large, well-known corporations to smaller, niche providers. The ratings scale ranges from A++ (Superior) to D (Poor), with notches (plus or minus signs) used to further refine the assessment within each grade. For instance, an A+ rating with a “++” notch signifies an exceptionally strong ability to meet financial obligations.
These ratings are relevant across various insurance types. For example, in life insurance, where policies can last for decades, the long-term financial stability of the insurer is critical.
In 2023, prominent life insurance companies like Northwestern Mutual, New York Life, and MassMutual all received A++ ratings from A.M. Best.
How A.M. Best Rates Insurance Companies
A.M. Best assigns credit ratings based on several factors, most notably its Financial Strength Ratings (FSRs). FSRs reflect a company’s ability to meet its policy and contract obligations. The agency’s ratings consider short-term, long-term, and ongoing financial commitments.
According to A.M. Best, these ratings are predictions based on an insurer’s balance sheet strength, operating performance, business profile, and enterprise risk management. Therefore, these ratings are not guarantees of future performance and should not be considered investment advice.
A.M. Best analysts perform quantitative and qualitative evaluations of various factors to calculate these ratings. These include balance sheet strength, operating performance, business profile, and enterprise risk management. These findings are then presented to a committee for a final rating decision.
The A.M. Best Rating Scale Explained
A.M. Best uses a letter grade system, ranging from A++ to D, to assess an insurance company’s financial health. Notches (+ or -) further differentiate financial strength within each grade.
- Superior: A++, A+
- Excellent: A, A-
- Good: B++, B+
- Fair: B, B-
- Marginal: C++, C+
- Weak: C, C-
- Poor: D
A “U” modifier, indicating “Under Review,” may be added if a rating is likely to change in the near term (usually within six months). This modifier can have positive, negative, or developing implications, indicating the potential direction of the rating change.
- Under review with positive implications: A rating upgrade is likely.
- Under review with negative implications: A rating downgrade is likely due to unfavorable conditions.
- Under review with developing implications: The outcome of the review is uncertain.
Using A.M. Best’s Ratings Effectively
A.M. Best’s FSRs provide a condensed and accessible way to evaluate an insurance company’s financial stability. Here’s how to use them effectively:
- Verify the Rating: Obtain the most current and accurate rating directly from the A.M. Best website.
- Check Subsidiaries: Large insurers like State Farm and Allstate often have separate subsidiaries for different insurance types (e.g., property, auto). Ensure you are reviewing the correct subsidiary’s rating.
- Understand the Factors: Look beyond the letter grade to understand the factors influencing A.M. Best’s assessment and determine if they are relevant to your needs.
- Review Rating History: Examine an insurer’s rating history to gauge its long-term financial health.
- Compare with Other Agencies: Consider ratings from other credit rating agencies like S&P Global and Moody’s for a more comprehensive view.
While FSRs are valuable, they should not be the sole factor in your insurance purchasing decision. They do not reflect policy rates, terms, or customer satisfaction. For insights into customer satisfaction, consider the National Association of Insurance Commissioners’ (NAIC) Complaint Index, J.D. Power’s customer satisfaction ratings, and the Better Business Bureau’s grades.
Conclusion
A.M. Best’s ratings offer a crucial indicator of an insurance company’s financial strength and ability to meet its obligations. While these ratings should not be the only factor in your decision-making process, they provide valuable insights to help you choose an insurance provider that aligns with your needs and risk tolerance.
Why Trust CNBC Select?
CNBC Select aims to provide high-quality journalism and consumer advice to help readers make informed financial decisions. Their insurance reviews are based on rigorous reporting from expert writers and editors. While CNBC Select earns commissions from affiliate partners, their content is created independently, without input from commercial teams or external parties.
