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When comparing life insurance policies, one factor worth considering is the financial strength of each insurer. After all, you want to purchase a policy from an insurance company that will be able to pay your beneficiaries in the future.

Assessing a company’s financial strength on your own is impossible. Fortunately, financial rating agencies like AM Best have done the heavy lifting.

Since its beginnings in 1899, AM Best has assessed and analyzed the creditworthiness of insurance companies across the globe. Today, it reports on over 16,000 insurers’ ability to pay their claims, debts and other financial obligations.

What Is a Financial Strength Rating?

A financial strength rating (FSR) is an opinion about an insurance company’s financial health and its likelihood to meet its financial obligations. In other words, it’s an evaluation of how well the insurance company is performing financially and its ability to pay claims and pay off debts.

Independent financial rating companies, such as AM Best, Moody’s and Standard & Poor’s, use their own methodology and ratings scales to determine the financial strength of individual insurers.

What Is the AM Best Financial Strength Ratings Scale?

AM Best has a financial strength rating scale ranging from A+ to D. Each rating may also have a notch, which signifies the strength of the company’s rating within that category. For example, if an A+ company has an additional “+” next to their ratings, AM Best views its financial strength as impeccable in the A+ category.

How Does AM Best Develop Financial Strength Ratings?

AM Best rates insurance companies with a focused ratings methodology, says Ken Johnson, managing director of rating analytics at AM Best.
To determine each company’s financial strength ratings, AM Best looks at multiple factors—qualitative and quantitative—to produce a well-rounded assessment. The core of the quantitative analysis includes a review of:

• Balance sheet strength
• Operating performance
• Business profile
• Enterprise risk management (ERM)

Johnson notes that in addition to assessing financial statements, AM Best conducts a qualitative assessment through annual rating meetings with each insurance company. These meetings give them full access to the company’s senior management to discuss their growth strategies and earnings, as well as where the company is going. For example, an insurance company might discuss new products on the horizon or their initiatives for innovation.

“Because each FSR from AM Best is forward-looking, these calls are essential for maintaining the usefulness of each company’s rating. In other words, open lines of communication help the analyst to confirm the company is on track to attain their stated goals,” adds Johnson.

The assessment is considered an interactive rating since it assesses qualitative and quantitative factors. This analysis ensures AM Best provides an accurate depiction of the current ratings for consumers.

How Often Does AM Best Review an Insurance Company’s Financial Strength?

AM Best reviews each insurance company’s financial strength rating annually. However, each company must complete a variety of checkpoints along the way to make sure that the current rating is in line with their future projections.

“To assess whether each company’s financial health is on track with its current ratings, AM Best reviews the company’s financials every six months. AM Best may also conduct quarterly calls with companies to review earnings,” Johnson says.

“In some cases, it might be necessary to connect with an insurer more than quarterly. For example, if there is a change in management or the company is launching a new product. AM Best will need to account for this information in their rating assessment,” he says.

What Does a “U” Modifier Mean?

If AM Best is concerned about a specific rating, it will add an “under review” modifier to the rating. This “under review” modifier is shown by adding a “u” to the rating. A “u” modifier isn’t always ominous because it may have positive implications.

The “u” modifier falls into three categories:

• Under Review with Positive Implications suggests that the data available may improve the ratings of this insurance company. For example, if the company is to be acquired by a stronger insurer, this might have positive implications for the company’s current ratings.
• Review with Negative Implications suggests that the data available may lower the company’s current ratings. For example, if earnings plummet, this could negatively affect the company’s ratings.
• Under Review with Developing Implications suggests, for example, if a company is being acquired, but the acquiring company hasn’t communicated its plans for the acquisition yet.

“Although each company is reviewed annually, a ‘u’ modifier may reset the clock a little bit. A company’s rating with an ‘under review’ status can last for up to six months. If the outcome hasn’t been rectified within this timeframe, AM Best will either extend the ‘under review ‘ period if additional information is required or place a rating with the current information available,” Johnson says.

How You Can Use Financial Strength Ratings When Shopping for Life Insurance

AM Best’s financial strength ratings can help you focus your search on strong companies when you’re looking for the best life insurance. Here’s how to use the AM Best rating for a company you’re considering.

Find the rating on the AM Best website

On the AM Best website home page, you’ll see a search box for “Rating Services.” Type in the full name of the company you’re looking for, such as Nationwide Life Insurance Company. Click “Go” and you’ll get the company’s AM Best page with its current financial strength rating, ratings in past years and other information.

There are in-depth reports available for a charge, but you’ll be able to find financial strength ratings for free.

Don’t focus solely on the letter itself

A financial strength rating is strictly a benchmark to compare insurance companies against their peers. For example, the difference between an A+ and an A- might not be because of performance results; it might be related to the business profile from a geographic concentration. In other words, that specific company might not be as diversified as others.

Take a look at ratings trends

AM Best offers up to five years of ratings and commentary. Taking a look at trends over time can give you an idea of the company’s stability. So, if you see the insurer has had an “A” rating for five years, you feel more confident in your purchasing decision.

Avoid relying solely on the ratings shown on the insurer’s website

Of course, insurance companies want to highlight their good ratings. They might not mention low ratings on their websites. It’s good to find the ratings yourself.

Compare several ratings across different rating agencies

Because rating agencies have their own methodologies, they can disagree on the ratings of specific companies. For this reason, it’s wise to see what different rating agencies have to say about the company you’re considering.

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