What Is AM Best?
AM Best is a credit rating agency focused exclusively on the worldwide insurance industry. AM Best assigns credit ratings that assess an insurance company's creditworthiness, which refers to the likelihood the company will default on its obligations. Consumers, financial professionals, and investors all use AM Best's credit ratings to help them make informed decisions.
AM Best uses a ranking system to provide the marketplace with a quantified assessment of a company's financial health. The U.S. Securities and Exchange Commission (SEC) has designated the company a nationally recognized statistical rating organization.
Key Takeaways
- AM Best is a credit rating agency that specializes in assessing the creditworthiness of insurance companies.
- Alfred M. Best founded AM Best in 1899 in New York City and began its ratings scheme following the 1906 San Francisco earthquake.
- AM Best uses both qualitative and quantitative measures to assess an insurance company's ability to pay claims and meet its financial obligations.
- AM Best's financial strength ratings range from the highest A++ to B+, to 10 vulnerable ratings, ranging from B to S, with the lowest indicating a rating was suspended.
Understanding AM Best
Founded in New York City in 1899 by Alfred M. Best, the privately held company is headquartered in Oldwick, New Jersey. The company began rating insurance companies in 1899 and expanded to reporting on related news following the 1906 San Francisco earthquake. Damage from the earthquake, which devastated much of the city, resulted in insurance claims that bankrupted 12 American companies and two more in Europe. The need for reliable information and ratings on insurers led to the company's strong growth. AM Best expanded to offices in the following locations: London in 1997, Hong Kong in 2000, Dubai in 2012, Mexico City in 2014, Singapore in 2015, and Amsterdam in 2018.
AM Best is the only credit rating agency that specializes solely in the insurance industry. Moody's, Fitch, and rate a wide range of debt instruments from both the public and private sectors in addition to insurance. AM Best's rating system focuses on an insurer's claims-paying ability and the credit quality of its obligations.
Today, consumers will often refer to AM Best's credit ratings to check on the financial stability and reputation of an insurance company before purchasing an insurance product. Financial professionals and investors that are looking to invest in an insurance company through a stock or bond purchase will review the company's AM Best ratings as part of their research and due diligence.
AM Best does business in more than 100 countries and assesses the creditworthiness and reports on over 16,000 insurance companies from around the world.
AM Best Rating System
AM Best issues a Best's Credit Rating (BCR) that rates both financial strength and issuer credit. The former indicates Best's assessment of an insurer's ability to meet its obligations to policyholders. It takes into account both qualitative and quantitative assessments of the balance sheet, operating performance, and business profile. Best has six secure ratings, ranging from the highest A++ to B+, and 10 vulnerable ratings, ranging from B to S, with the lowest indicating a rating was suspended.
Best's short-term credit ratings reflect the company's ability to pay commitments due in less than a year, and they range from a high of AMB1+ to a low of D (in default). Long-term credit ratings reflect the company's ability to pay its commitments maturing in more than a year, and range from AAA (exceptional) to D (in default).
Criticism of AM Best
In Sept. 2008, the financial market crisis hit insurance holding company American International Group (AIG) hard, as enormous losses at its derivative trading subsidiary, AIG Financial Products, threatened to bring down the entire company, including the dozens of insurance companies that it owned. The holding company's stock fell dramatically, and rating agencies were forced to quickly and aggressively cut the company's rating. The federal government took over and bailed out the company with $182 billion of financial support, which was repaid in full by the end of February 2013.
The rating agencies, including AM Best, were sharply criticized for not recognizing sooner the risk that AIG's aggressive trading operations created. Best cut AIG's financial strength rating to A+ (superior) from A++ (superior) and issuer credit ratings to "aa" from "aa+" as the company faced collapse.
