Life Insurance Company Ratings Explained

Life insurance and annuities have always been considered to be among the safest of all financial instruments. Even as banks were being shuttered during the Great Depression resulting in people losing their life’s savings, life insurers emerged as the bed rock of financial security. Their preeminence as stable and safe financial institutions continues to this day thanks, in part, to the vigilance of the independent ratings firms that keeps the pressure on all life insurers to perform at their financial best. The ratings that these companies assign to life insurance companies provide the public with the insight it needs to be able to determine their relative strength.

A Host of Rating Firms to Keep Watch

All financial institutions are thoroughly analyzed and evaluated by several rating firms, including Standard and Poor’s and Moody’s. The life insurance industry has the eyes of one additional rating firm on it dedicated exclusively to rating and ranking life insurance companies for their financial strength, and that is A.M. Best which has been doing its work for over one hundred years.

Each ratings firm applies its own distinct methodology and criteria for evaluating life insurers, so their rankings may not correlate with one another. But all strive to achieve the same purpose and that is to conduct as thorough an analysis as possible of the balance sheets, income statements, general accounts, and business prospects of each insurer to provide a clear picture of their current financial condition as well as their ability to deliver on their obligations in the future. The product of their process is a complete financial analysis of each company and an assigned rating of their relative strength within the ratings category.

Because of their differing methodology and criteria, the analysis and ratings of each rating company should be considered independently of one another. However, you will find that their ratings and their rankings are similar, so a life insurer that rates highly with one ratings firm will probably rate equally as well with another. There are a few instances where the ratings and rankings my diverge somewhat, but not by very much.

Generally, the higher the rating assigned to a life insurer, the higher the probability that the insurer will be able to meet its obligations even in poor economic conditions. Companies assigned lower ratings are suspected of having some issues related to their balance sheet or business prospects which raises questions as to their ability to withstand poor economic conditions. Again, the criteria differs from one ratings firm to another.

The Meaning Behind the Ratings

Here is an overview of how the firms apply the ratings and the meaning behind them. The definitions are supplied by the ratings firms. Only the higher ratings are presented here. The lower ratings supplied by each of the rating firms imply that the life insurer would be vulnerable in deteriorating economic conditions:

A.M. Best

A++ and A+ (Superior):The company has demonstrated superior overall performance and has a very strong ability to meet its obligations to policyholders over a long period of time.
A and A- (Excellent):The company has demonstrated excellent overall performance and has a strong ability to meet its obligations to policyholders over a long period of time.

B++ and B+ (Very Good): The company has demonstrated very good overall performance and has a good ability to meet its obligations to policyholders over a long period of time.
B and B- (Adequate): The company has an adequate overall performance and can meet its obligations to policyholders, but may be vulnerable to unfavorable changes in underwriting or economic conditions.
C++ and C+ (Fair): The company has demonstrated fair overall performance and can meet its current obligations to policyholders, but is vulnerable to unfavorable changes in underwriting or economic conditions.

Standard and Poor’s

AAA: Superior financial security on an absolute and relative basis. Capacity to meet policyholder obligations is overwhelming under a variety of economic and underwriting conditions.
AA: Excellent financial security. Capacity to meet policyholder obligations is strong under a variety of economic and underwriting conditions.
A: Good financial security, but capacity to meet policyholder obligations is somewhat susceptible to adverse economic and underwriting conditions. BBB Adequate financial security, but capacity to meet policyholder obligations is susceptible to adverse economic and underwriting conditions.

BB: Financial security may be adequate, but capacity to meet policyholder obligations, particularly with respect to long-term or “long-tail” policies, is vulnerable to adverse economic and underwriting conditions.

B: Vulnerable financial security. Currently able to meet policyholder obligations, but capacity to meet policyholder obligations is particularly vulnerable to adverse economic and underwriting conditions.
CCC: Extremely vulnerable financial security. Continued capacity to meet policyholder obligations is highly questionable unless favorable economic and underwriting conditions prevail.
The ratings from “AA” to “B” may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

Moody’s

Aaa: Exceptional financial security. While the financial strength of these companies is likely to change, such changes as can be visualized are most unlikely to impair their fundamentally strong position.
Aa: Excellent financial security, together with the Aaa group, they constitute what are generally known as high-grade companies. They are rated lower than Aaa companies because long-term risks appear somewhat larger.

A: Good financial security. However, elements may be present which suggest a susceptibility to impairment sometime in their future.
Baa: Adequate financial security. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time.
Ba: Questionable financial security. Often the ability of these companies to meet policyholder obligations may be very moderate and thereby not well safeguarded in the future.

Summary

Each of the rating firms issues a caution that their ratings and analysis are not a warranty of the life insurer’s financial strength. But, it would seem reasonable that, if a life insurer has been assigned the highest ratings of each ratings firm, it is the strongest possible indication of its financial strength. From a consumer perspective, since the promises and obligations are only as solid as the companies that back them, those the highest rankings from all three ratings firms should warrant initial, if not primary consideration.