What do insurance company financial ratings mean?
The simple explanation is that the financial ratings of insurance companies mean the company is either on solid footing or may be at risk (or somewhere in between). Although there are several rating systems, they all use letters to indicate financial stability.
If a company has an A or some variation of it, that’s a good thing, while the lowest grade will vary quite a bit. Some follow a grade system like the one you remember from high school, while others are very different. Here’s a look at the AM Best rating scale as well as the other top agencies.
| Agency | Ratings |
|---|---|
| AM Best | A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F |
| Demotech | A'', A', A, S, M, L |
| Standard and Poor's | AAA, AA+, AA, AA-, A, A+, A, BBB, BB, B, CCC, CC, C, R, SD, D |
| Moody's | Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C |
| Fitch | AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D |
| Kroll Bond Rating | AAA, AA, A, BBB, BB, B, CCC, CC, C, D |
AM Best and Demotech both focus on insurance companies, while the others rate multiple industries. And AM Best ratings of insurance companies are what you’re most likely to see.
So what does an AM Best score mean? According to the agency, it’s an independent evaluation of a company’s ongoing ability to meet its financial obligations. And that means its obligations to you, the policyholder.
"A carrier being downgraded by any of the rating companies is the biggest red flag. This is an indication that something has gone wrong and shaken the financial stability," Scott Hammersand, CPRM, a personal lines risk advisor with Ohio insurance broker Overmeyer Hall Associates, says.
What are financial strength ratings based on?
Much like how insurance companies come up with your rates, rating agencies use a variety of factors to come up with their ratings. Common ones include:
- How much cash the company has in reserve
- Ratio of debt to financial assets
- How many sources of revenue the company has
- How the company manages risk
- The type of policy the company writes (high or low risk)
"The AM Best agency considers the company's business profile, operating performance, balance sheet, and how the company performs in relation to creditors," Ryze says.
Essentially, the ratings look at how far into the black the company is and what the risk is that it will slip into the red in the future. Having a lot of cash in reserve and diverse sources of revenue while being careful about the risk it takes on all serve to keep a company in the black. And that means it will get a thumbs up from the rating agencies.
Which insurance companies have the best financial ratings?
Generally speaking, any insurance company in the top 10 for market share scores well with the financial rating agencies. It makes sense; the company sells many policies, bringing in revenue and spreading the risk.
"The main reason homeowners should concern themselves with financial strength ratings is to be sure they avoid the carriers with poor financial health. It would be smart to avoid less stable situations when there are so many stronger options available," Hammersand says.
Here’s a look at an insurance company ratings comparison using 2024 AM Best financial ratings for some of the biggest insurance companies in the U.S., including the top 10.
| Company | AM Best rating |
|---|---|
| Allstate | A+ |
| Amica | A+ |
| American Family | A |
| Berkshire Hathaway (Geico) | A++ |
| Chubb | A++ |
| Farmers | A- |
| Liberty Mutual | A |
| Nationwide | A |
| Progressive | A+ |
| State Farm | A++ |
| Travelers | A++ |
| The Hartford | A+ |
| USAA | A++ |
That doesn’t mean smaller companies aren’t financially secure. They may well be, even if the big agencies don’t rate them. However, it’s something to keep in mind when you’re shopping for home insurance.
Most companies will post the ratings on the company website; however, they may choose not to display any unfavorable ratings. Fortunately, the information is widely available directly from rating agencies. A quick search will turn up what you need to know.
"Also, be wary of a company that increases your insurance rates by 40% or more. Usually, an increase in rates could be a sign of increased risk insuring you, but it could sometimes indicate a lack of capital reserves, which forces the company to increase your premiums to fund their reserves and manage debt," Ryze says.
Why insurance company financial strength ratings matter
Insurance companies can and do go out of business. Sometimes it’s due to the high cost of doing business in certain areas. Both Florida and Louisiana have seen multiple companies go under due to issues like major storms and litigation, sending homeowners in hurricane-prone areas hunting for new coverage.
Financial ratings can’t always predict something like that, but the more financially secure your insurer is, the less likely the company will run into trouble. And that’s peace of mind for you.
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