Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated September 28, 2023 Reviewed by Reviewed by Marguerita ChengMarguerita is a Certified Financial Planner (CFP), Chartered Retirement Planning Counselor (CRPC), Retirement Income Certified Professional (RICP), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
An insurance company credit rating is the opinion of an independent agency regarding the company's financial strength and ability to pay policyholders’ claims. It doesn't 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.
There are four major insurance company rating agencies: Moody’s, A.M. Best, Fitch, and Standard & Poor’s (all but A.M. Best 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).
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.
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.
They tell consumers whether or not an insurer can be expected to pay claims. People and businesses depend on insurance companies to pay claims when they suffer an insured loss. 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.
Moody’s, A.M. Best, Fitch, and Standard & Poor’s are the best-known ratings agencies (all except A.M. Best 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.