|E. Insurance Company Ratings. There are three (3) recognized methods of evaluating insurance companies based on independent ratings. The following will give a brief analysis of the rating systems and their differences.
Best Insurance Ratings. The principal rater of the insurance industry has been the A.M. Best Company. The A.M. Best Company has provided insurance ratings for property insurance companies, life companies and related products. Best provides two ratings: a Letter rating and a Roman Numeral classification. The Letter rating includes many qualitative and quantitative factors of an insurance company's financial condition and operating performance. It considers liquidity, profitability, capitalization, spread of risk, reinsurance, diversification, loss reserves, surplus adequacy, management experience and market presence. The Best ratings range from AA+ to F. The secured ratings at Best are considered AA+ to B+. Anything from B to F is considered vulnerable. E and F are in state supervision or in liquidation.
In addition, Best will provide a roman numeral classification based on policy holder surplus. These range from Roman Numeral I to Roman Numeral XV which is smallest to largest.
The Standard & Poor Property/Casualty Insurer Solvency Review. Standard & Poor analyzes available financial data provided by the National Association of Insurance Commissioners to determine a qualified solvency rating. S&P analyzes the claims-paying ability and potential solvency of a number of insureds throughout the county. In order to have claims-paying ability analyzed, an insurance company must voluntarily submit to S&P scrutiny. However, in order to broaden that base, since only a small portion of insureds submitted to the voluntary review and analyses, S&P has developed a broader form called Qualified Solvency Ratings.
The claims-paying ability of S&P ratings range from AAA through EEE to R. AAA being the best, EEE being extremely vulnerable financial ratings and R being regulatory action.
The border form of qualified solvency ratings are as follows: BBBq - statistical tests indicate adequate or better financial security; Bbq - statistical tests indicate that financial security may be adequate; Bq - statistical tests indicate vulnerable financial security; R - regulatory action.
The S&P ratings as property and casualty insurers are not as clear as the Best ratings.
Standard & Poors, Moody and other rating agencies review of the debt of insurance companies. As is typical of all companies which issue public debt, the rating agencies will give standardized ratings to the debt instruments of public insurance companies. In the case of Standard & Poors, these range from AAA downward; and in the case of Moody's from AA downward. Investment Grade ratings in the case of both major rating agencies entail ratings that range from either AAA to BBB- in the case of Standard & Poors, or AA to BBB- in the case of Moodys. An analysis of the debt instruments issued by insurance companies can often be helpful in assessing their financial quality.
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