The A.M. Best Company (commonly called Best's) was founded in 1899. The company's stated mission is “to perform a constructive and objective role in the insurance industry towards the prevention of insurer insolvencies.” In addition to evaluating the financial status of insurers, Best's actively consults with and advises them on the basis for their rating and suggests actions a company should take to maintain its rating or to improve it. Best's is the oldest and most widely recognized provider of insurer ratings, financial data and news. According to their website, the company issues ratings of approximately 3,400 companies in more than 90 countries.

 The objective of Best's Financial Strength Rating system is to provide an independent opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and contractual obligations. The system is not designed to assess any other risk, such as an insurer's ability to pay claims or any specific liability. Best's conducts an extensive quantitative and qualitative evaluation of rated insurers based on various sources of information accumulated over many years. This knowledge is acquired through frequent contacts with company officials as well as financial statements, special questionnaires and other sources.

 To obtain a Best's rating, a property/casualty insurer must have at least five consecutive years of operating experience, net premiums in excess of $1.5 million in surplus, must submit the requested financial information and pay a fee.

 Among the factors considered when evaluating an insurer's financial condition are the degree, trends and components of a company's earnings over the most recent five-year period, profits, net investment income, expenses, reinsurance, reserving practices, market value of assets, regulatory constraints and underwriting experience. Capital and surplus, the stability, trend, type and diversification of premium volume, the ratio of reinsurance premiums ceded and loss reserves to surplus to measure the companies' exposure and dependence on reinsurance. Best's reviews each insurer's reinsurance program to determine whether coverage is adequate for the potential risks involved. If a company has a relationship with an affiliate through an investment, reinsurance or pooling agreement, data are consolidated to reflect this affiliation.

 Various other important factors may be considered in the qualitative analysis, particularly those that may significantly affect a company's ability to meet its contractual obligations. Best's research and analysis in other areas may identify market or economic trends that could affect an insurer's financial condition.

Rating Classifications

Best's has several different rating classification systems, of which the most commonly used by insurance agents, brokers and risk managers is the Financial Strength Rating of insurers. Under this classification system, companies are assigned both an alphabetical rating which range from A++ (Superior) down to F (In Liquidation), and a Financial Size rating that ranges from a high of XV (more than $2 billion in adjusted policyholder surplus) down to I (less than $1 million in adjusted policyholder surplus).

 Insurers that do not receive an alphabetical rating may receive an “NR” classification for various reasons (such as not enough current information is available) or may show a rating of “u” if the company is currently under review.

 Insurers may elect not to have their rating published. If that happens, a company receives an NA-4 “Company Request” designation. In this instance, Best's normally requires a period of time to elapse before the company is again eligible for the assignment of a rating.

 In addition to an insurer's financial strength and size evaluation, the A. M. Best Company also provides creditworthiness rating and other financial surveys and reports.

 STANDARD AND POOR'S

Standard & Poor's Financial Services LLC (S&P), a division of S & P Global, is the second leading insurer rating agency in terms of the number of domestic insurers rated, with virtually the same number of insurers assigned letter-grade ratings as A.M. Best. It has been rating the claims-paying ability of insurers since 1983. The company utilizes a classification framework similar to that of A. M. Best, and its work is conducted by professional analysts whose experience and training is focused on the insurance industry. Unlike A.M. Best, however, S&P sees its role as one of providing risk assessment of insurers to insurance buyers rather than serving as an advisor to insurers to assist them in improving their financial condition and rating.

 S&P introduced qualified solvency ratings of insurers in 1991 in response to market demands for information on insurers for which it did not provide a claims-paying ability rating. The qualified solvency ratings are based on a statistical analysis of statutory financial data that includes company capitalization, investments and liquidity, profits, loss reserve adequacy and reinsurance recoverables. Insurers are “benchmarked” against industry norms in the quantitative portion of the evaluation but there is no specific formula or algorithm used to score companies based on their statistical results. S&P's claims-paying ability ratings are based on a comprehensive quantitative and qualitative financial analysis using various sources of information including interviews with company management.

 All claims-paying ability ratings are voluntary and insurers pay a rating fee that depends on size, number of affiliated insurers, and other factors. In connection with their initial application for a claims-paying ability rating, insurers have the option of not completing the process and/ or not having a claims-paying ability rating published.

 Claims-Paying Ability Ratings

As discussed above, S&P provides one of two types of ratings of an insurer's financial strength: a claims-paying ability rating or a qualified solvency rating. The claims-paying ability rating is an opinion of an insurer's financial capacity to meet the obligations of its insurance policies in accordance with their terms. Claims­paying ability ratings are further divided into two classifications: secure and vulnerable. Rating categories range from “AAA” (Secure) to “D” (in liquidation). Some classifications are modified by a plus or minus sign to show the relative standing of the insurer within those rating categories.

 Qualified Solvency Ratings

Insurers that do not voluntarily apply for a claims-paying ability rating are assigned a qualified solvency rating based on a quantitative analysis of their financial data. Qualified solvency ratings are computed for individual insurers without consideration of parent or affiliated companies. Qualified solvency rating designations range from BBBq to Bq. The “q” suffix indicates the qualified nature of the rating because it is based strictly on a statistical analysis.

 S&P distributes its ratings through several publications and over the telephone. S&P also publishes other insurance industry reports and analyses supporting its ratings and provides other information on market conditions.

 MOODY'S INVESTORS SERVICE

Founded in 1900, Moody's Investors Service rates securities of some 4,000 industrial companies, public utilities, banks and other financial institutions. In addition, Moody's rates the credit worthiness of a wide variety of financial obligations, including the debt securities of insurance companies since the mid-1970s. Moody's began assigning insurance company financial strength ratings in 1986. Although Moody's rates fewer insurers than A.M. Best or S&P, the company has a solid reputation for thoroughness and expertise in its insurer rating activities.

 Moody's financial strength ratings reflect the company's opinion regarding an insurer's ability to discharge policyholder obligations and claims. In measuring an insurer's “credit risk,” Moody's conducts a quantitative and qualitative analysis of the industry, regulatory trends and the business fundamentals of the insurer. The “credit risk” is the risk that an insurer will fail to honor its senior policyholder claims in full and on a timely basis.

 In the early 1990's, Moody's estimated that its rated property/casualty insurers represented 60% of net premiums written for the domestic property/casualty industry and 50% of net written premiums for the domestic reinsurance industry.

 Rating Classifications

Like A. M. Best, Moody's uses a system of alphanumeric symbols for its insurer financial strength and bond quality ratings. The rating symbols range from Aaa-Bbb (strong) to Ba-C (weak). Numeric qualifiers (1-3) further distinguish insurers within the rating symbols.

 In addition to its credit and bond ratings, Moody's also publishes other insurance industry reports and analyses supporting its ratings and provides other information on market conditions.

 SUMMARY

The essential objective of the rating agencies discussed above and others is to assess and offer an opinion as to the ability of an insurer to meet its obligations to its policyholders. With the exception of S&P's qualified solvency ratings most rating companies follow similar rating processes.

 However, because of the complexity of information analyzed and variations in rating philosophies, the rating companies sometimes issue different rating opinions of the same insurers. The agencies disagree often enough so that a company's rating from two or more agencies should be considered before deciding to purchase a particular insurer's policy. In addition, because agencies will occasionally announce changes of ratings, it is prudent to periodically re-check the ratings of any insurer. Some important points to keep in mind when reviewing insurer ratings:

 ·To use the ratings from more than one independent agency, you need to understand that each agency's rating classification is different from the others. For example, an A+ from A.M. Best is the second best rating, but an A+ from S&P is the 5th-highest rating. Moreover, Moody's doesn't have an A+ rating.

 ·Don't rely on what the insurance companies say about their ratings from these agencies. Companies may highlight a high rating from one agency and ignore a lower one from another agency.

 ·Some insurers may manipulate or otherwise under-reserve claims. Whether done intentionally or because of sloppy management, the effect can be an artificially inflated surplus, which may result in a false sense of security about the company's financial position and its ability to pay claims.

 ·An insurance company needs to have been in business at least 5 years to develop a meaningful record of financial security. Insurance companies aren't even eligible to be rated by Best's until they have five consecutive years of operating history. Remember that for occurrence-based liability coverages, it may be necessary in 10 or 20 years to tender claims to insurers you choose today.

 ·Establish a minimum threshold of acceptability for insurers you intend to use. Some risk managers will consider only the largest “blue chip” carriers while others are perfectly satisfied doing business with smaller, lower capitalized insurers.

 ·The outsourcing of much or all of an insurer's claims function can signal that the company either doesn't have sufficient resources to handle its own claims or doesn't care enough about claims to handle them internally. Proper quality controls can be maintained only if claims are done in-house or a stringent control program is in place and closely monitored.

 Many insureds rely heavily on their agent or broker to consider only top-quality insurers when placing coverages. Indeed, most large brokers have established procedures and standards they follow when selecting insurers and many maintain their own approved lists of acceptable insurers. The most sophisticated brokers have highly trained staffs dedicated to the task of researching insurer solvency. However, there is no substitute for your own due diligence.

 All of the ratings agencies mentioned above can be found on the Web, or reached by phone.