What Is AM Best?
AM Best is a global credit rating agency primarily focused on the worldwide insurance industry. It provides independent assessments of the financial strength and creditworthiness of insurance companies and other related entities. Within the broader realm of financial services, AM Best's ratings are used by consumers, financial professionals, and investors to evaluate an insurer's ability to meet its financial obligations, such as paying claims to policyholders27. The U.S. Securities and Exchange Commission (SEC) has designated AM Best as a Nationally Recognized Statistical Rating Organization (NRSRO), acknowledging its role in providing reliable credit ratings.
History and Origin
AM Best was founded in 1899 by Alfred M. Best in New York City with the objective of reporting on the financial stability of insurers26. The company's early growth was significantly influenced by major industry events, such as the Baltimore Conflagration of 1904 and the San Francisco Earthquake and Conflagration of 190624, 25. These catastrophic events highlighted the critical need for objective assessments of insurer solvency, prompting increased demand for AM Best's reports and ratings23. In 1905, AM Best developed its first insurance company credit ratings, and by 1907, it introduced its initial alphabetical credit rating scale22. Over its long history, AM Best has continued to evolve its methodology and expand its global presence, becoming a prominent authority in insurance analysis21.
Key Takeaways
- AM Best is a specialized credit rating agency assessing the financial health of insurance companies.
- Its ratings help consumers and financial professionals gauge an insurer's capacity to pay claims and meet financial commitments.
- AM Best is recognized as a Nationally Recognized Statistical Rating Organization (NRSRO) by the SEC.
- The rating process incorporates both quantitative and qualitative evaluations of an insurer's operations and financial standing.
Interpreting the AM Best Rating
AM Best issues Best's Credit Ratings (BCR), which encompass Best's Financial Strength Ratings (FSR) and Issuer Credit Ratings (ICR)20. The FSR provides an opinion on an insurer's ability to meet its ongoing insurance policy obligations, while the ICR reflects the insurer's capacity to meet its financial commitments19.
AM Best's Financial Strength Ratings (FSRs) utilize a letter-grade scale, similar to academic grades, to indicate an insurer's financial strength:
- Superior: A++, A+
- Excellent: A, A-
- Good: B++, B+
- Fair: B, B-
- Marginal: C++, C+
- Weak: C, C-
- Poor: D
- In Liquidation: E
- Rating Suspended: S18
The ratings reflect AM Best's opinion and are not recommendations to buy, hold, or sell any financial products17. When evaluating a rating, it is important to consider the context of an insurer's business profile, its market position, and the specific type of insurance it offers.
Hypothetical Example
Consider an individual, Maria, seeking a new homeowners insurance policy. She obtains quotes from several insurance providers. To assess their reliability, Maria decides to check their AM Best Financial Strength Ratings.
Company A has an AM Best FSR of "A+" (Superior), indicating a very strong ability to meet its policyholder obligations. Company B has a rating of "B+" (Good), suggesting an adequate, though less robust, financial position. Company C holds a rating of "B-" (Fair), implying its financial strength may be susceptible to adverse changes in economic conditions.
Based on this, Maria, who prioritizes the security of her claims, might prefer Company A, even if its premium is slightly higher. This simple example demonstrates how AM Best ratings can inform a consumer's decision-making process by providing a quick, standardized measure of an insurer's financial health.
Practical Applications
AM Best ratings are widely used across the insurance industry and by various stakeholders. For instance, insurance brokers and agents often use these ratings to recommend financially sound insurers to their clients16. Corporations also leverage AM Best ratings when selecting insurers for their commercial policies, ensuring that their chosen provider has the financial capacity to cover potential losses.
From a regulatory standpoint, AM Best, as an NRSRO, plays a role in the oversight framework. Both the SEC and the National Association of Insurance Commissioners (NAIC) acknowledge the importance of NRSROs for evaluating the credit risk of securities held by insurers15. For example, the NAIC has historically used NRSRO ratings to determine capital requirements for U.S. insurance companies14. While the NAIC has evolved its approach, reducing direct reliance on credit ratings for certain asset classes post-2008 financial crisis, the ratings from agencies like AM Best continue to be an important reference point for regulators and market participants12, 13.
Limitations and Criticisms
While AM Best ratings are a valuable tool, they are subject to certain limitations and criticisms that apply broadly to credit rating agencies. One significant concern raised by regulators, including the NAIC, is the potential for "ratings shopping" where insurers might seek the highest rating rather than the most appropriate assessment to minimize regulatory capital requirements10, 11. The 2008 financial crisis brought increased scrutiny to the reliance on credit ratings, as some highly-rated structured securities experienced significant failures, leading to a loss of public confidence in the ratings themselves8, 9.
Additionally, credit ratings are inherently opinions and not guarantees of future performance7. They reflect an assessment at a specific point in time and may not react quickly enough to rapidly changing market or economic conditions6. The analytical process involves subjective judgments despite its rigorous quantitative and qualitative components, including the evaluation of balance sheet strength, operating performance, and enterprise risk management5. Therefore, users of AM Best ratings should consider them as one piece of information in a comprehensive due diligence process, rather than the sole basis for investment or purchasing decisions.
AM Best vs. Credit Rating Agency
AM Best is a type of credit rating agency, but its distinguishing characteristic is its exclusive focus on the global insurance industry. In contrast, generalist credit rating agencies like Standard & Poor's (S&P), Moody's Investors Service, and Fitch Ratings assess a broader range of entities, including corporations, governments, and financial instruments such as corporate bonds and government debt4.
The primary difference lies in their specialization and scope. AM Best's analytical methodologies are tailored specifically to the unique risks and regulatory environment of insurers3. This deep industry focus allows AM Best to provide highly granular and relevant insights into the financial stability of insurance entities. While all these agencies aim to provide opinions on creditworthiness, AM Best's ratings are specifically designed for the complexities of insurance operations, covering aspects like underwriting risk, reserving practices, and policyholder obligations, which may not be as prominent in the analysis of a typical industrial corporation.
FAQs
What does an "A" rating from AM Best mean?
An "A" rating (A, A-) from AM Best signifies that the insurance company possesses an "Excellent" ability to meet its ongoing policyholder obligations2. It indicates a strong level of financial strength and a sound capacity to handle claims.
Is AM Best a government agency?
No, AM Best is not a government agency. It is a privately held credit rating agency headquartered in Oldwick, New Jersey. However, it is regulated by the U.S. Securities and Exchange Commission (SEC) and designated as a Nationally Recognized Statistical Rating Organization (NRSRO).
How often are AM Best ratings updated?
AM Best continuously monitors the financial health of the insurers it rates. While specific update frequencies can vary based on company performance and market conditions, ratings are subject to ongoing surveillance and formal review meetings1. Significant changes in an insurer's operations or the broader economic environment can trigger more frequent assessments.