AM Best: What It Is, How It Works, and Real-World Examples


AM Best is a renowned credit rating agency that focuses on evaluating the creditworthiness of insurance companies. Founded in 1899, it plays a crucial role in helping consumers, financial professionals, and investors make informed decisions. This article provides a detailed insight into AM Best, its history, rating system, and its impact on the insurance industry.

What is AM Best?

AM Best is a distinguished credit rating agency with a singular focus on the global insurance industry. It assigns credit ratings to gauge an insurance company’s creditworthiness, providing insight into the likelihood of the company defaulting on its financial obligations. AM Best’s credit ratings are invaluable to consumers, financial experts, and investors, aiding them in making well-informed choices.

The history of AM Best

Founded in 1899 by Alfred M. Best in New York City, AM Best initially started rating insurance companies after the devastating 1906 San Francisco earthquake. The earthquake led to insurance claims that bankrupted several American and European companies, highlighting the need for reliable information and ratings on insurers. This event spurred AM Best’s growth, leading to the establishment of offices in London (1997), Hong Kong (2000), Dubai (2012), Mexico City (2014), Singapore (2015), and Amsterdam (2018).

AM Best’s unique focus

AM Best distinguishes itself as the sole credit rating agency dedicated exclusively to the insurance industry. While agencies like Moody’s, Fitch, and Standard & Poor’s rate various debt instruments across sectors, AM Best concentrates on an insurer’s claims-paying capability and the credit quality of its obligations.

AM best in the modern world

Today, consumers frequently turn to AM Best’s credit ratings to assess the financial stability and reputation of insurance companies before purchasing their products. For financial professionals and investors considering investments in insurance companies through stocks or bonds, AM Best’s ratings serve as a vital part of their research and due diligence process. Operating in over 100 countries, AM Best assesses the creditworthiness and reports on more than 16,000 insurance companies globally.

AM best rating system

AM Best employs a comprehensive Best’s Credit Rating (BCR) system that evaluates both financial strength and issuer credit. Financial strength ratings reflect the insurer’s ability to meet its obligations to policyholders, considering qualitative and quantitative assessments of the balance sheet, operating performance, and business profile.

Rating tiers

The BCR system consists of six secure ratings, ranging from the highest A++ to B+, and ten vulnerable ratings, ranging from B to S, with the lowest indicating a suspended rating. Short-term credit ratings assess the company’s ability to meet commitments due in less than a year, with ratings ranging from AMB1+ (highest) to D (default). Long-term credit ratings gauge the company’s ability to meet commitments maturing in over a year, ranging from AAA (exceptional) to D (default).

Criticism of AM Best

In September 2008, the financial market crisis had a profound impact on American International Group (AIG), an insurance holding company. Enormous losses at AIG’s derivative trading subsidiary, AIG Financial Products, posed a significant threat to the entire company, including its numerous insurance subsidiaries. This crisis led to a sharp decline in the holding company’s stock value, prompting rating agencies, including AM Best, to swiftly and aggressively downgrade AIG’s ratings.

AM Best’s role in the AIG crisis

AM Best faced criticism for not recognizing the risks posed by AIG’s aggressive trading operations sooner. The agency downgraded AIG’s financial strength rating from A++ (superior) to A+ (superior) and issuer credit ratings from “aa+” to “aa” as the company faced potential collapse. Ultimately, the federal government stepped in with a $182 billion bailout, which AIG fully repaid by February 2013.

Weigh the risks and benefits

Here is a list of the benefits and drawbacks to consider.

  • Reliable assessment of insurance company’s creditworthiness
  • Helps consumers make informed decisions
  • Assists financial professionals and investors in due diligence
  • Criticism for failing to recognize risks in certain cases
  • Potential impact on company ratings during financial crises

Frequently asked questions

What makes AM Best different from other credit rating agencies?

AM Best specializes exclusively in the insurance industry, focusing on assessing an insurer’s claims-paying ability and the credit quality of its obligations, while other agencies rate a wide range of debt instruments across sectors.

Are AM best ratings the only factors to consider when evaluating an insurance company?

No, while AM Best ratings are important, other factors such as financial statements, company reputation, and the type of insurance offered should also be considered in the evaluation process.

Can an insurance company improve its AM Best rating?

Yes, insurance companies can take steps to improve their AM Best rating by maintaining a strong balance sheet, demonstrating consistent operating performance, and effectively managing risks.

How often does AM Best update its ratings?

AM Best reviews and updates ratings on a regular basis to ensure they accurately reflect the current financial health and creditworthiness of insurance companies.

How can I access AM Best ratings for insurance companies?

You can access AM Best ratings through their official website or by subscribing to financial news services that provide this information. Many insurance company websites also display their AM Best ratings for transparency.

Are there any specific criteria or factors that AM Best considers in its ratings?

AM Best uses a combination of quantitative and qualitative factors to assess insurance companies. These factors include the company’s financial stability, operating performance, and business profile. They also consider the company’s ability to meet its policyholder obligations and the quality of its financial obligations.

How often do AM Best ratings change?

AM Best regularly reviews and updates ratings to ensure they accurately reflect the current financial health of insurance companies. Ratings may change when a company’s financial situation changes significantly, which can happen due to various factors such as economic conditions or changes in the insurance market.

Key Takeaways

  • AM Best is a specialized credit rating agency that assesses the creditworthiness of insurance companies, helping consumers and investors make informed decisions.
  • Founded in 1899, AM Best’s history is marked by its response to the 1906 San Francisco earthquake, which highlighted the need for reliable insurance ratings.
  • AM Best’s unique focus on the insurance industry sets it apart from other rating agencies.
  • The agency’s ratings have a significant impact on consumers, financial professionals, and investors.
  • AM Best’s rating system considers both financial strength and issuer credit, providing a comprehensive assessment of an insurer’s capabilities.
  • While AM Best is a respected authority, it has faced criticism for not recognizing risks in certain cases, as seen in the AIG crisis.
View article sources
  1. AM Best: Country Risk Ratings – Michigan State University
  2. A. M. BEST COMPANY – Federal Deposit Insurance Corporation
  3. Independent Financial Ratings – New Hampshire
  4. American National Insurance Company (Company) 2023 Reviews – SuperMoney