What you need to know about A.M. Best ratings evaluating insurance companies' financial strength.
Since 1899, A.M. Best has been evaluating insurance companies' ability to fulfill their financial obligations by issuing annual grades.
CNBC Select frequently employs A.M. Best's ratings to identify the top insurance companies across various categories.
A.M. Best ratings provide valuable information about insurance companies, including their rankings, grading criteria, and how to utilize them when selecting insurance policies.
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What is A.M. Best?
To pay out claims, an insurer must be financially sound. As an independent credit rating agency, A.M. Best translates financial data into understandable letter grades for consumers, investors, and the insurance industry.
Best's Review and Rating Service evaluates and assigns grades to over 16,000 insurance companies worldwide, ranging from well-known brands to specialized providers. The grades range from A+ to D, and each grade may have a notch (or an additional "+") to denote its level of excellence within that grade. For instance, an A+ company with exceptional performance in fulfilling its obligations would be classified as A++.
The financial stability of a life insurance company is crucial since a policy may not pay out for an extended period. Thus, A.M. Best's grades are significant for all types of insurance.
In 2023, A.M. Best gave A++ ratings to Northwestern Mutual, New York Life, and MassMutual.
Some insurance companies, such as State Farm, Geico, Travelers, and USAA, offer A++ ratings for both homeowners and auto insurance policies.
How does A.M. Best rate insurance companies?
A.M. Best evaluates insurers' credit in various categories, including their short-term, long-term, and ongoing financial obligations. While it is best known for its financial strength ratings (FSRs), these assess a company's ability to fulfill all of its policy and contract obligations.
A.M. Best ratings are based on balance sheet strength, performance, business profile information, and other data, but they do not guarantee future performance or provide investment advice.
A.M. Best's analysts conduct "quantitative and qualitative evaluations" of a company's financial health, operations, reputation, and risk management, and present their findings to a committee that votes on a rating recommendation.
What is the A.M. Best rating scale?
Best assigns insurance companies letter grades ranging from A+ to D, with the option to include a notch for further financial strength distinction within a grade.
Based on A.M. Best's assessment of a company's ability to fulfill ongoing obligations, the following are the grade categories.
- 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-
- Poor: Rating: D
If a company's grade has an Under Review modifier, it suggests that there is a possibility of a near-term change to its score, which could be positive or negative, within the next six months.
- Recent information suggests that there is a good chance the grade will be improved.
- The company is at risk of a rating downgrade due to unfavorable financial or market conditions.
- The review's outcome is still uncertain.
How to use A.M. Best's ratings
Insurance companies can be evaluated using the important metric provided by FSRs, which distill a lot of financial information into an accessible format.
- To ensure a score is current and accurate, obtain it directly from the A.M Best website.
- Ensure you're examining the correct subsidiary of major carriers like State Farm and Allstate for property, auto, and other insurance categories, as each subsidiary is graded separately by A.M. Best.
- To assess a company's creditworthiness, A.M. Best considers factors beyond its score and notch.
- Evaluate an insurer's financial stability by examining its long-term grade.
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Bottom line
Financial strength ratings are created by A.M. Best for the insurance industry, which measures a company's ability to pay claims and fulfill financial obligations. This factor can help you choose the right insurance company for your needs.
Why trust CNBC Select?
Our goal at CNBC Select is to deliver top-notch service journalism and in-depth consumer advice to our readers, enabling them to make well-informed decisions when it comes to their finances. Each insurance review we publish is the result of thorough reporting by our team of expert writers and editors, who possess extensive knowledge of insurance products. At CNBC Select, we are committed to maintaining our journalistic standards and ethics, even though we earn a commission from our affiliate partners on many offers and links.
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