Moody’s Investors Service

Detailed Analysis of Creditworthiness

Financial analyst using computer. Getty Images/B Busco

Weak financial strength ratings can make a difference in an insurance company’s ability to pay claims, enter new markets or expand insurance product offerings. When choosing an insurance company, you want a company that can perform well not only now, but also in the future. This is where insurance rating organizations can play a role. Insurance rating organizations consider several factors in determining a company’s financial strength such as capital, reserves and the company balance sheet along with other factors.

Companies with a strong financial rating generally have a low chance of failure and you can feel safe placing your business there. One of the best-known insurance rating organizations is Moody’s Investors Service.

Company History

Moody’s Investors Service is a subsidiary of Moody’s Corporation and provides credit ratings, research and risk analysis. The company was first called Moody’s Analyses Publishing Company and was founded in 1909 by John Moody. The company originally produced statistics for stock and bonds along with bond ratings. John Moody is recognized as the inventor of modern bond credit ratings. In 1975, Moody’s was recognized by the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization. Moody’s was originally owned by Dun & Bradstreet but became a separate entity in 2000. The headquarters is located at 7 World Trade Center, New York City.

Moody’s Investors Services has a presence in more than 115 countries worldwide.

Moody’s Analysis Process

In order to produce accurate financial strength ratings, Moody’s using a detailed rating process:

  • Information is gathered to evaluate risk to current and prospective investors
  • Analysts meet and determine an appropriate rating
  • Analysts monitor security to determine if any rating should be changed
  • Analysts inform the marketplace of the Moody rating for a company

Moody’s Financial Strength Ratings

Moody’s financial strength ratings measure a company’s creditworthiness. This relates to an insurance company’s ability to pay debts and insurance claims as well as what losses can be expected in the event the company defaults. Moody’s assigns ratings varying from Aaa to C with Aaa the highest financial strength rating. Here is a complete list of Moody’s financial strength ratings:

  • Aaa: Highest rating with lowest overall credit risk
  • Aa1, Aa2, Aa3: High quality with very low credit risk
  • A1, A2, A3: Upper-medium rating grade with low credit risk
  • Baa1, Baa2, Baa3: These ratings are medium grade. Some elements may exist which will pose a moderate credit risk.
  • Ba1, Ba2, Ba3: These companies have elements that pose a significant credit risk
  • B1, B2, B3: High credit risk
  • Caa1, Caa2, Caa3: Judged as poor with a very high credit risk
  • Ca: This rating means a company is close to default but may still have a chance to recover
  • C: This is the lowest rating given by Moody’s and means the company is in default with very little chance to recover.

    Ratings Aaa – Baa3 are considered prime and are broken down this way:

    In addition to the ratings, companies are further separated into “Prime” and “Not Prime.” Rating grades Aaa – Baa3 are considered prime. Companies rated Ba1 – C are speculative grades and considered not prime. Here is a further breakdown of prime and not-prime ratings.

    • Prime-1: Ratings Aaa-Aa3 – These insurance companies are considered the strongest financially with the greatest ability to pay back short-term debt.
    • Prime-1/Prime-2: Ratings A1 – A3 – Insurance companies with these financial strength ratings still have a high ability to repay short-term debt.
    • Prime-2: Baa1 - Strong ability to repay short-term debt
    • Prime-2/Prime-3: Baa2 and Baa3 – Ability to pay back short-term debt is acceptable
    • Not Prime: Ba1 - C

    The Bottom Line

    As you can see, Moody’s analysis of creditworthiness is very detailed.

    You can be sure that insurance companies that pass the tests with Moody’s and come away with the highest ratings have been put under the microscope. Moody’s Investors Service offers consumers a chance to get a better look at how an insurance company is performing financially. You need to know not only how well your insurance company is performing now but also the long-term outlook. Moody’s does an excellent job in helping consumers find a financially stable insurance company. Other insurance rating organizations that offer comparable services include: A.M. Best, Fitch Ratings and Standard and Poor’s and several others. To find out more about using Moody’s rating services; you can visit the Moody’s Investors Service website, or call 1-212-553-1653.