Financial Ratings: What They Are and Why They Matter

Wed Aug 10 2022

Serious young couple sit at a table studying documents together

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.


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