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When researching insurance companies, you may have noticed that several top providers advertise an AM Best rating. Since their inception, AM Best ratings have become a benchmark within the insurance industry. And although an AM Best rating is a simple letter grade, it provides an enormous amount of information about the financial health of an insurance company that can help you compare between insurance companies.
What does AM Best do?
Founded in 1899, AM Best is the oldest credit agency in the world — as well as the largest — and specializes in the insurance industry. It is also recognized by the U.S. Securities and Exchange Commission (SEC) as an official credit rating provider.
The AM Best rating scale provides a financial and credit snapshot of over 16,000 insurance companies. Without financial strength ratings, it would be difficult for the general public to analyze and review all the financial and credit information for each of these thousands of companies. Instead, AM Best conducts the research and offers independent information and evaluation services for each one, so consumers can form their own opinions about a carrier’s financial stability.
What are AM Best ratings?
AM Best ratings are based on the 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 ratings have four different categories: financial strength, credit ratings, issue ratings and national scale ratings. Most online reviews feature a company’s financial strength ratings (FSR).
In the insurance world, it is important to understand if a carrier can meet the financial obligations of its policyholders. As a consumer, you expect a timely claim payout for covered perils when purchasing a policy. AM Best established its rating system to assess the historical ability of a carrier to payout claims and meet other financial responsibilities. Behind each level of an assigned rating is a detailed, thorough analysis of numerous financial aspects within a carrier.
How AM Best ratings work
AM Best 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. Among the wide range of factors, AM Best uses findings from the following:
- Balance sheet: The balance sheet review includes an analysis of a carrier’s financial flexibility and risk analysis.
- Operational performance: This looks at the long-term financial stability of a carrier and the future balance sheet strength, plus the historical performance.
- Business profile: This is the in-depth review of the market position, competition, pricing and data quality, underwriting performance and many other critical business markers.
- Enterprise risk management (ERM): This looks at the appetite for risk and how the carrier manages risk based on the corporate objectives.
- Rating meetings: These meetings are used to uncover information for the carrier regarding company strategic goals, management practices and overall financial objectives.
AM Best rating scale for financial strength
The following table shows the differences between each rating. The rating scale for FSR uses the common grading method, with letters A through D. In addition to a letter grade, there may also be a “+” or “-” tacked on, called rating “notches.” The rating notches are used to show further strengths or weaknesses within the assigned category.
|Rating symbol||Rating notches||Category|
Over time, companies can influence their rating grade. Suppose there is an update in debt obligations, company strategy, operations or other financial indicators highlighting the financial health of a carrier. In either of those cases, the ratings can change to reflect the movement.
AM Best rating scales for issuer credit rating
Another AM Best rating scale is its long-term and short-term issuer credit rating (ICR) scales. These measure an insurance company’s ability to meet ongoing financial obligations based on time. AM Best defines its short-term ICR rating as an “opinion” of an insurance company’s ability to meet ongoing financial obligations with a maturity date of less than one year, while the long-term ICR is for ongoing senior financial obligations.
AM Best’s Short-Term Issuer Credit Rating (Short-Term ICR) Scale
|Rating categories||Rating symbols|
AM Best’s Long-Term Issuer Credit Rating (Long-Term ICR) Scale
|Rating symbol||Rating notches||Category|
|aa||+ / –||Superior|
|a||+ / –||Excellent|
|bbb||+ / –||Good|
|bb||+ / –||Fair|
|b||+ / –||Marginal|
|ccc||+ / –||Weak|
AM Best ratings for top providers
Below is a chart featuring AM Best rating information for several national carriers. When you are determining which carrier to purchase a policy from, it is helpful to look at the features and rates it offers as well as consider financial strength.
|Insurance company||AM Best FSR||AM Best long-term ICR|
|Allstate||A+ (Superior)||aa (Superior)|
|Farmers||A- (Excellent)||a (Excellent)|
|Geico||A++ (Superior)||aaa (Exceptional)|
|Liberty Mutual||A (Excellent)||a (Excellent)|
|Progressive||A+ (Superior)||aa (Superior)|
|State Farm||A++ (Superior)||aa+ (Superior)|
|Travelers||A++ (Superior)||aa+ (Superior)|
|USAA||A++ (Superior)||aaa (Exceptional)|
Why AM Best scores matter
Although the AM Best scores provide a simple method of assessing the historical financial strength and stability of a carrier, they do not guarantee a well-rated carrier can meet all financial obligations. A carrier must pay rating fees to receive the full rating service from AM Best and the process typically takes 11–14 weeks to complete. Because the ratings take into account previous financial performance, it can be difficult for a new company to establish a rating, which means it may be years before a carrier can be rated. Although AM Best is the first credit rating service in the world, it is one of many, with other agencies such as Standard and Poor’s, Moody’s or Fitch providing their own analyses.
With the help of AM Best ratings, analyzing the financial picture of each insurance carrier is easier for consumers. Understanding a carrier’s historical ability to payout claims and meet its financial obligations may give you added confidence or hesitation when choosing a company. Ultimately, AM Best is only one of the numerous tools available to consumers to find the best carrier for their insurance needs.