DEFINITION of 'A.M. Best'

A.M. Best is a credit rating agency focused on the worldwide insurance industry. Founded in New York City in 1899 by Alfred M. Best, the privately held company is headquartered in Oldwick, New Jersey. Both the U.S. Securities and Exchange Commission and the National Association of Insurance Commissioners have designated the company a nationally recognized statistical rating organization.

BREAKING DOWN 'A.M. Best'

A.M. Best is the only ratings agency that specializes solely in the insurance industry. Moody's, Fitch and Standard & Poor's rate a wide range of debt instruments from both the public and private sectors in addition to insurance. A.M. Best's rating system focuses on an insurer's claims paying ability and the credit quality of its obligations.

Background of A.M. Best

The company began rating insurance companies in 1899, and expanded to reporting on related news following the 1906 San Francisco earthquake. Damage from that quake, which devastated much of the city, resulted in insurance claims that bankrupted 12 American companies and two more in Europe. The need for reliable information and ratings on insurers led to the company's strong growth.

A.M. Best expanded to London in 1997, Hong Kong in 2000 and the Middle East in 2012.

Collapse of AIG

In September 2008, the financial market crisis hit insurance holding company AIG hard, as enormous losses at its derivative trading subsidiary, AIG Financial Products, threatened to bring down the entire company, including the dozens of insurance companies that it owned. The holding company's stock fell more than 60%, and rating agencies were forced to quickly and aggressively cut the company's rating. The federal government took over and bailed out the company with $185 billion of financial support, which was repaid in full by the end of February 2013.

The rating agencies, including Best, were sharply criticized for not recognizing sooner the risk that AIG's aggressive trading operations created. Best cut AIG's rating to A (excellent) from A+ (superior) as the company faced collapse.

Rating System

Best issues both financial strength and issuer credit ratings. The former indicates the company's assessment of an insurer's ability to meet its obligations to policyholders. It takes into account both qualitative and quantitative assessments of the balance sheet, operating performance and business profile. Best has six secure ratings, ranging from the highest A++ to B+, and 10 vulnerable ratings, ranging from B to S, with the lowest indicating a rating was suspended.

Best's short-term credit ratings reflect the company's ability to pay commitments due in less than a year, and they range from a high of AMB1+ to a low of D (in default). Long-term credit ratings reflect the company's ability to pay its commitments maturing in more than a year, and range from AAA (exceptional) to D (in default).

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