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.

Key Takeaways

  • An insurance company credit rating indicates an insurance company's solvency, financial strength, and ability to pay policyholder claims.
  • An insurance company credit rating is considered an opinion (not a fact) issued by an independent agency.
  • Because each independent rating agency has its own rating scale, the same insurance company can receive different ratings among the various agencies.
  • The four major insurance company rating agencies in the U.S. are A.M. Best, Moody's, Standard & Poor's, and Fitch.

Understanding 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 the 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).

Special Considerations

An entity that appears to be a single, major insurance company may 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, Metropolitan Tower Life Insurance Company, and Delaware American Life Insurance Company. Each subsidiary will have its own insurance company credit rating based on how the rating agency in question views that company's financial strength.

What's more, these ratings differ from the parent company’s corporate credit ratings, which can include separate ratings for preferred stock and senior unsecured debt.

Benefits of Insurance Company Credit Ratings

Insurance company credit ratings are important because many 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.