Insurance financial ratings explained

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 of financial companies are so important to providers and policyholders.

What are financial strength ratings?

Insurance company financial ratings 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

Home insurance companies are typically rated by one of these six companies: 

• AM Best. 

• Demotech, Inc.

• Fitch Ratings.

• Standard & Poor’s Insurance Rating Services.

• Moody’s.

• Kroll Bond Rating Agency (KBRA).

The best known of these is probably AM Best.

What factors do financial rating companies look at?

Independent rating agencies typically look at a company's records and financial statements to determine how they want to rate the company. Depending on the rating company, these statements might include:

• Balance sheets.

• Reports filed with regulators.

• Economic and industry reports. 

• Reinsurance information.

Demotech is unique among these insurance company financial rating agencies in that it can evaluate new insurance companies. Newer insurance companies don’t have as much historical information, so Demotech’s rating focuses on pro forma financial statements, or statements that forecast future periods, for new insurers.

What is a good financial rating for home insurance?

Every ratings agency has its own way of scoring the strength of financial companies and other firms. Ratings companies differ in both methodology – the factors they consider and the weight they assign each factor affecting a company’s financial stability – and their rating scales.

For example, while an A rating is the second-best score a company can receive from AM Best, the same rating is a whole notch lower on the Fitch Ratings, Moody’s, and S&P Global ratings scales

Why financial ratings matter

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. (Check out Freddie Mac’s specific requirements for an example.)

We’ve gathered the financial rating scales for the six independent ratings agencies and listed them below.

AM Best financial rating scale

Get detailed definitions for AM Best’s rating scale categories.

Demotech, Inc. Financial Stability Ratings^®  (FSRs)

See how Demotech defines each FSR.

Fitch Ratings financial strength rating scale

Read more about Fitch Ratings’ rating scale definitions.

Moody’s long-term insurance financial strength ratings scale

Find out more about Moody’s rating symbols and definitions.

S&P Global credit rating scale

Learn more about S&P Global’s credit ratings.

Kroll Bond Rating Agency, Inc.

Read the details of KBRA’s insurance ratings.

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 method for assigning financial ratings for insurance companies tends to favor 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.

Financial ratings are just one of the important factors you want to consider when choosing an insurance company. Find out what else goes into making the best home insurance companies.