An insurance company’s financial ratings are not just important to investors, they are a way for you to be sure your insurance company is financially secure. Why is this important? You want to know your insurance company will be around will you need it for such things as servicing your policy or paying claims. This information is also important when choosing an insurance company . Fitch Ratings was one of the first rating agencies recognized by the Securities and Exchange Commission.
Fitch Ratings is part of the Fitch Group and is jointly owned by the Hearst Corporation and Fimalac, S.A. The company was founded by John Knowles Fitch in 1913 and is headquartered in New York City. Fitch Ratings holds the distinction of being the first rating company to develop the “AAA” to “D” financial rating scale. There are more than 50 offices worldwide with over 2,000 employees. In addition to providing credit ratings for insurance companies and other financial organizations, it also conducts market research important to investors and other financial professionals.
How it Works
The Fitch Rating Group uses different criteria for developing its ratings of insurance companies. Some of the determining factors include management style, economic trends and the historical performance of an insurance company. It also uses data gathered from insurance companies, underwriters and public financial reports. The ratings measure credit quality and a company’s ability to repay its debts. The insurance marketplace is unpredictable and an insurance company’s ratings can change from one year to the next.
Fitch ratings for insurance companies are divided into long-term and short-term ratings. If an insurance company is listed as “not rated” that means that Fitch Ratings has not completed a complete financial evaluation of the organization. The plus(+) or minus(-) may be assigned to show distinctions with rating categories. The following is a breakdown of the rating definitions:
- AAA: Exceptionally strong – This is the highest rating assigned by Fitch. Companies with this rating have the strongest ability to meet financial and policyholder obligations. These organizations will most likely not be affected adversely by economic conditions.
- AA: Very strong – Companies are expected to perform well and continue to meet financial obligations. Also, these companies will likely not be affected adversely by economic conditions.
- A: Strong – Companies rated “A Strong” are expected to perform well and meet all financial obligation although they may be more likely to succumb to an economic downturn and market condition than the insurance companies of a higher rating.
- BBB: Good – This rating indicates insurance companies who are currently meeting all policyholder and financial obligations but could be impacted by negative economic conditions.
- BB: Moderately weak – Moderately weak companies are vulnerable and changes in the market could make them unable to meet financial obligations. These companies may have alternatives that allow them to improve their financial condition.
- B: Weak – These companies have a strong chance of not being able to meet financial obligations but still have a chance to recover financially.
- CCC: Very Weak – These companies have a strong possibility of not being able to meet financial obligations. Such companies have an average change of recovering.
- CC: Extremely Weak – A “CC” rating indicates that an insurance company is likely to be unable to meet financial obligation or pay claims to its policyholders. There is a below-average change for recovery for these insurance companies.
- C: Distressed – A distressed rating shows the financial instability is imminent with a strong possibility of not being able to meet financial obligations. Recovery chances are poor.
- F1 – Very capable of meeting all short-term obligations
- F2 – Good ability to pay any short-range financial obligations
- F3 – These companies are rated with an adequate ability to pay short-term obligations
- B – Weak ability to pay back any financial obligations
- C – Very weak short-term outlook for upholding financial obligations
Significance of Ratings
Rating organizations such as the Fitch Group, A.M. Best and Standard & Poor’s help investors make sound financial decisions and help policyholders evaluate the financial stability of an insurance company. These ratings are not facts, but opinions of qualified financial specialists who use important criteria to evaluate a company’s credit-worthiness. Insurance companies look closely at these ratings because a positive or negative rating can affect consumer confidence. This has a direct bearing on the company’s profitability such as how many new policies an insurance company can write.
To access the Fitch Ratings or find out more about its research reports, visit the Fitch Ratings website. You can call the New York office at (212) 908-0500.