The tricky thing about homeowners insurance is that it’s all about trust. You don’t get a physical product, so you have to believe that your insurance company will be able to meet its obligations to you should you file a claim. This is why financial ratings are so important to insurance providers and policyholders.
What Are Financial Strength Ratings?
Financial ratings, sometimes called financial strength ratings or FSRs, are scores that help consumers know if an insurance company is financially healthy. They were created by independent ratings companies to indicate if an insurer can pay claims, especially in a catastrophic scenario.
Independent Financial Rating Companies for Home Insurers
Six different companies rate home insurance companies, and each one has a unique way of evaluating financial strength::
- AM Best.
- Demotech, Inc.
- Fitch.
- Standard & Poor’s Insurance Rating Services.
- Moody’s.
- Kroll Bond Rating Agency.
The best known of these rating companies is probably AM Best.
What Factors Do Financial Rating Companies Look At?
The independent rating agencies look at a company's records and financial statements to determine its FSR. Depending on the rating company, these statements might include:
- Balance sheets.
- Reports filed with regulators.
- Economic and industry reports.
- Reinsurance information.
Demotech, Inc is unique among these financial rating companies in that it can evaluate new insurance companies. Newer insurance companies like Kin don’t have as much historical information, so Demotech, Inc focuses on pro forma financial statements, or statements that forecast future periods, for new insurers.
What Is a Good Financial Rating for Home Insurance?
When you’re looking for home insurance, you want to look for a company with a high rating. In fact, your insurance company’s financial strength is so important that your mortgage lender most likely requires your insurer to have achieved a certain rating. This generally means sticking to companies with an A grade because that indicates a company is in good financial standing with the capacity to handle catastrophic claims scenarios.
We’ve gathered the financial rating scales for the six independent ratings agencies and listed them below.
AM Best Financial Rating Scale
| Rating Symbol | Rating Category |
|---|---|
| A+ | Superior |
| A | Excellent |
| B+ | Good |
| B | Fair |
| C+ | Marginal |
| C | Weak |
| D | Poor |
Demotech, Inc. Financial Stability Ratings
| Rating Symbol | Rating Category |
|---|---|
| A’’ | Unsurpassed, A Double Prime |
| A’ | Unsurpassed, A Prime |
| A | Exceptional |
| S | Substantial |
| M | Moderate |
| L | Licensed |
| NR | Not rated |
| N/A | Not eligible |
Fitch Financial Strength Rating Scale
| Rating Symbol | Rating Category |
|---|---|
| AAA | Highest credit quality |
| AA | Very high credit quality |
| A | High credit quality |
| BBB | Good credit quality |
| BB | Speculative |
| B | Highly speculative |
| CCC | Substantial credit risk |
| CC | Very high levels of credit risk |
| C | Near default |
| RD | Restricted default |
| D | Default |
Moody’s Ratings Scale
| Rating Symbol | Rating Category |
|---|---|
| Aaa | Highest quality, lowest level of risk |
| Aa | High quality, very low credit risk |
| A | Upper-medium grade, low credit risk |
| Baa | Medium grade, moderate credit risk |
| Ba | Speculative with substantial credit risk |
| B | Speculative, high credit risk |
| Caa | Speculative, very high credit risk |
| Ca | Speculative, near default with some prospect of recovery |
| C | Default with little prospect of recovery |
Standard & Poor’s Global Ratings
| Rating Symbol | Rating Category |
|---|---|
| AAA | Investment grade, extremely strong |
| AA | Investment grade, very strong |
| A | Investment grade, strong |
| BBB | Investment grade, adequate capacity |
| BB | Speculative grade, less vulnerable |
| B | Speculative grade, more vulnerable |
| CCC | Speculative grade, currently vulnerable |
| CC | Speculative grade, highly vulnerable with expected default |
| C | Speculative grade, currently highly vulnerable to nonpayment |
| D | Speculative grade, payment default |
Kroll Bond Rating Agency, Inc.
| Rating Symbol | Rating Category |
|---|---|
| AAA | Almost no risk |
| AA | Minimal risk |
| A | Small risk |
| BBB | Medium quality |
| BB | Low quality with moderate risk |
| B | Low quality with high risk |
| CCC | Substantial risk |
| CC | Near default with average recovery expectations |
| C | Near default with low recovery expectations |
| D | In default |
Is One Financial Rating Company Better than Another?
Just like insurance companies, financial rating companies have pluses and minuses. Many insurance companies like to get rated by AM Best because it’s a large, well-known rating agency that has been around a long time and focuses solely on insurance. But its rating method favors older, more established insurers.
Other financial rating companies may not have been around as long as AM Best, but that doesn’t mean they aren’t as good. Demotech, for example, had its methodology reviewed and accepted by Fannie Mae and Freddie Mac in 1990, just five years after it started.
All in all, the six ratings companies have solid reputations for accurately reflecting an insurance company’s ability to pay claims and handle debts. Just remember that ratings can change, so you want to know what an insurance company’s rating is before you buy or renew a policy.
