How Are Life Insurance Companies Rated
There are several independent companies that rate financial institutions and life insurance companies. Though these agencies may approach their goals of rating life insurers with different methodologies, their primary focus is to analyze and rate insurance carriers based on their ability to pay out promised benefits. The four principal rating agencies for insurers are: Moody’s, Standard and Poor’s, Fitch, and A.M. Best. Others include Weiss ratings and the Comdex, which is an index primarily based on the ratings of the four principal agencies.
- According to their website, ‘A.M. Best Company is a global full-service credit rating agency dedicated to serving the insurance industry. It began assigning credit ratings in 1906… Best’s Credit Ratings are independent opinions regarding the creditworthiness of an insurer… based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile…’
- A.M. Best Reports not only rates insurers, but give a significant amount of information concerning the insurer. Best’s Agents Guide has been used for decades by insurance professionals. A.M. Best ratings include: A++ and A+ which are Superior and Secure ratings; and A and A– which are Excellent and Secure ratings; and B++ and B+ which are Good and Secure ratings; B and B– which are Fair and Vulnerable ratings; C++ Marginal and Vulnerable ratings; down to D, a Poor and Vulnerable rating; and beyond to E, F, and S ratings.
- According to their website, ‘The system of rating securities was originated by John Moody in 1909 .’ Moreover, Moody’s Rating Symbols and Definitions April 2012 guide states, ‘Moody’s long-term ratings are opinions of the relative credit risk of financial obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings use Moody’s Global Scale and reflect both the likelihood of default and any financial loss suffered in the event of default.’
- Moody’s primarily offers 9 rating classifications from Aaa to C. ‘Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.’ ‘Obligations rated Aa are judged to be of high quality and are subject to low credit risk.’ ‘Obligations rated A are considered upper-medium grade and are subject to low credit risk.’ ‘Obligations rated Baa
are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.’ ‘…Ba …are subject to substantial credit risk.’ ‘…B …are considered speculative and are subject to high credit risk.’ ‘…Caa …are …of poor standing…’ ‘…Ca …are highly speculative…’ and ‘obligations rated C are the lowest rated class…’
- According to their website, ‘…With offices in 23 countries and a history that dates back more than 150 years, Standard & Poor’s is known to investors worldwide as a leader of financial-market intelligence… Today Standard & Poor’s strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions .’ Standard & Poor’s also states that it uses ‘a balance of quantitative and qualitative evaluations.’
- S & P’s assigns ratings from AAA to SD, D, and R (under regulatory supervision). “…An obligor rated ‘AAA’ has extremely strong capacity to meet its financial commitments. ‘AAA’ is the highest issuer credit rating assigned by Standard & Poor’s.’ ‘An obligor rated ‘AA’ has very strong capacity to meets its financial commitments but is somewhat susceptible to the adverse effects of changes and economic conditions…’ ‘An obligor rated ‘A’ has strong capacity to meet its …commitments. However, adverse economic conditions… are more likely to lead to a weakened capacity …to meet its financial commitments.’ ‘Obligors rated ‘BB’, ‘B’, ‘CCC’, and ‘CC’ are regarded as having significant speculative characteristics…’”
- According their website, ‘Fitch Ratings knows what it takes to deliver value, meaning and insightful ratings to market participants. With coverage across all areas of the insurance market including life, property & casualty, and reinsurance, our experienced analysts apply an open and balanced approach to credit assessment. … Our Insurance analysts balance local expertise with global oversight to distinguish their ratings in the marketplace.’
- Fitch’s ‘National Insurer Financial Strength Ratings’ range from AAA to C. AAA is ‘the highest rating assigned,’ ‘AA …ratings denote a very strong capacity to meet policyholder obligations…’ ‘A… ratings denote a strong capacity to meet policyholder obligations…’ ‘BBB …ratings denote an adequate capacity to meet …obligations…’ ‘BB National IFS Ratings denote a fairly weak capacity to meet policyholder obligations relative to all other obligations or issuers…’