AM Best is a credit rating service that solely focuses on the global insurance business. AM Best gives credit ratings to insurance companies that measure their creditworthiness, or the likelihood that they would default on their obligations. AM Best’s credit ratings are used by consumers, financial professionals, and investors to make educated decisions.
AM Best employs a ranking system to provide a quantitative assessment of a company’s financial health to the market. The Securities and Exchange Commission (SEC) of the United States has classified the firm as a nationally recognized statistical rating agency.
Understanding AM Best
Alfred M. Best founded the privately held corporation in New York City in 1899, and it is headquartered in Oldwick, New Jersey. Following the 1906 San Francisco earthquake, the firm expanded its reports to include insurance company ratings. The earthquake’s destruction of much of the city prompted in insurance claims that bankrupted 12 American corporations and two more in Europe.
The demand for trustworthy insurance information and ratings drove the company’s rapid expansion. AM Best established offices in 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 firm devoted entirely to the insurance industry. Moody’s, Fitch, and Standard & Poor’s grade a wide range of debt instruments, both governmental and private, as well as insurance. AM Best’s rating approach is based on an insurer’s capacity to pay claims and the credit quality of its obligations.
Today, people frequently consult AM Best’s credit ratings to determine an insurance company’s financial soundness and reputation before purchasing an insurance product. Financial experts and investors intending to invest in an insurance company through a stock or bond purchase will conduct research and due diligence on the company’s AM Best ratings.
AM Best Rating System
AM Best’s Credit Rating (BCR) assesses both financial strength and issuer credit. The former reflects Best’s appraisal of an insurer’s capacity to meet its policyholder commitments. It evaluates the balance sheet, operating performance, and business profile qualitatively and quantitatively. Best has six secure ratings ranging from A++ to B+ and ten vulnerable ratings ranging from B to S, with the lowest suggesting a rating suspension.
Best’s short-term credit ratings, which vary from AMB1+ to D, represent the company’s capacity to make commitments due in less than a year (in default). Long-term credit ratings, which range from AAA (outstanding) to D, reflect the company’s capacity to pay commitments maturing in more than a year (in default).
Criticism of AM Best
The financial market crisis hit insurance holding company American International Group (AIG) hard in September 2008, as massive losses at its derivative trading business, AIG Financial Products, threatened to bring down the entire company, including the dozens of insurance companies it owned. The holding company’s shares dropped precipitously, and rating agencies were forced to downgrade the company’s rating promptly and forcefully. The federal government took over and bailed out the corporation, providing $182 billion in financial assistance, which was fully repaid by the end of February 2013.
The rating agencies, particularly AM Best, were heavily chastised for failing to recognize the risk that AIG’s aggressive trading operations posed sooner. As the corporation approached collapse, Best reduced AIG’s financial strength rating to A+ (superior) from A++ (superior) and issuer credit ratings to “aa” from “aa+.”
Best AM. “AM Best Downgrades American International Group, Inc. and Life Subsidiaries Ratings.” Accessed on December 4, 2020.
Summery:
- AM Best is a credit rating service that specializes in evaluating insurance businesses’ creditworthiness.
- Alfred M. Best formed AM Best in New York City in 1899 and launched its grading scheme in the aftermath of the 1906 San Francisco earthquake.
- AM Best evaluates an insurance company’s capacity to pay claims and meet its financial responsibilities using both qualitative and quantitative indicators
- AM Best’s financial strength ratings vary from A++ to B+ to 10 susceptible ratings ranging from B to S, with the lowest signifying that the rating has been suspended.
