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 was jointly owned by the Hearst Corporation and Fimalac, S.A until April 2018, when Hearst purchased the last 20% of remaining equity, making itself the sole owner. 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 38 offices worldwide with over 1,500 analysts who have rated over 20,000 entities. 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: 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: 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: 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: 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 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: These companies have a strong chance of not being able to meet financial obligations but still have a chance to recover financially.
- CCC: These companies have a strong possibility of not being able to meet financial obligations. Such companies have an average change of recovering.
- CC: A “CC” rating indicates that an insurance company is likely to be unable to meet financial obligations or pay claims to its policyholders. There is a below-average change for recovery for these insurance companies.
- C: 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.
- D: A default rating shows the company is in the process of bankruptcy and/or ceasing business operations.
- 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
- D: Default of a broad-based event or short-term obligation
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. It has a direct bearing on the company’s profitability such as how many new policies an insurance company can write.