What is Insurance Company Credit Rating
An insurance company credit rating is the opinion of an independent agency regarding the financial strength of an insurance company. An insurance company’s credit rating indicates its ability to pay policyholders’ claims. It does not indicate how well the insurance company’s securities are performing for investors. In addition, an insurance company’s credit rating is considered an opinion, not a fact, and ratings of the same insurance company can differ among rating agencies.
BREAKING DOWN Insurance Company Credit Rating
There are four major insurance company rating agencies: Moody’s, A.M. Best, Fitch and Standard & Poor’s (the last two companies also provide corporate credit ratings for investors). Each agency has its own rating scale that doesn’t necessarily equate to another company’s rating scale, even when the ratings appear similar.
For example, A.M. Best’s highest insurance company credit rating is A++, meaning superior, while Fitch’s is AAA for exceptionally strong, Moody’s is Aaa for highest quality, and Standard & Poor’s is AAA for extremely strong. It is important not to confuse, for example, A.M. Best’s second-best rating of A+ (for superior) with Fitch’s fifth-best rating of A+ (for strong), or A.M. Best’s C rating (for weak) with Moody’s C (for lowest rated).
An entity that appears to be a single, major insurance company may actually be composed of several smaller insurance companies, each with its own insurance company credit rating. For example, MetLife, Inc., has a number of subsidiaries, including American Life Insurance Company, General American Life Insurance Company, MetLife Insurance Company of Connecticut and New England Life Insurance Company. Moody’s has rated American Life Insurance Company as A1, while it has rated the other three Aa3. What's more, these ratings differ from the company’s corporate credit ratings, which have included, for example, Baa2 for MetLife, Inc. preferred stock and A3 for MetLife, Inc. senior unsecured debt, in April 2014.
Why Insurance Company Credit Ratings are Important
Insurance company credit ratings are important because numerous people and businesses depend on insurance companies to pay claims when they suffer an insured loss. Insured risks are usually those that would cause a large financial loss if not insured. However, insurance companies can only pay if they have the money. Like other businesses, insurance companies can become insolvent. Additionally, many people and businesses depend on insurance companies to pay for legal services, such as defending against a lawsuit. Few people can afford the exorbitant costs of today's litigations. Without money for defense, they could be held unjustly liable for an occurrence. To prevent these tragedies, people and businesses purchase insurance. Insurance company credit rating agencies seek to prevent insurance company insolvency by issuing insurer financial strength ratings (IFS ratings) that are freely available for public inspection.