How to read a financial strength rating report line by line

A rating announcement looks like a single letter, and most people stop reading there. The letter matters, but the paragraphs underneath it say more: which legal company was rated, whether the agency expects the grade to hold, what it counts as strengths and weaknesses, and what events would move the rating up or down. This post reads one sample announcement line by line, so that the next time an insurer you own a policy with appears in a rating release, you know where to look and what to ask.

The sample is invented. The company is fictional, the numbers are made up and the layout is a composite of how rating announcements are generally organized, not a copy of any agency's format. Real releases differ in wording and structure between agencies and over time, so use this as a map of the kinds of information to find, not a template to match. For the scales themselves, see the guide on AM Best, S&P, Moody's and Fitch ratings explained, which lists AM Best's, S&P's, Moody's and Fitch's letters and their descriptors.

The sample announcement

Rating action: Example Mutual Life Insurance Company (fictional)

Each line of the sample carries information. The sections below take them in order.

Line 1: the grade and the action

The letter is the headline. In the sample, A+ sits in the "Superior" band of AM Best's scale, one step below A++, the strongest. The descriptor, such as "Superior" or "Excellent," is the agency's own word for the band, and the bands use different words at different agencies, as the guide linked above explains.

The word beside the letter is just as important. An action of "affirmed" means the agency looked at the company and kept the grade. "Upgraded" and "downgraded" mean the grade moved. "Assigned" means a new rating on a new company or entity. An affirmation is mildly reassuring because it shows the company was reviewed recently. A downgrade is a signal to read the rest of the announcement closely, since the reasons are in the rationale. See should you leave your insurer after a ratings downgrade? for what to weigh when that happens.

A rating is an opinion about an insurer's ability to meet its obligations to policyholders. It is not a score of every product, and it says nothing about how the company handles claims or customer service. Agencies are explicit that it is not a recommendation to buy, hold or surrender a particular policy.

Line 2: the outlook and the date

The outlook tells you the agency's view of where the rating is likely to go over a longer horizon, commonly a year or two or more. "Stable" means the agency does not expect a change. "Positive" and "negative" mean a change is more likely in that direction. A negative outlook on a strong grade is a flag, not a verdict. The company may well keep its grade, and many do. But it tells you that the agency sees pressure.

Agencies also use a separate designation, often called "under review" or a "watch," for situations where a change is likely in the near term, for example after an announced acquisition, a major reinsurance deal or a large loss. The labels differ by agency, and the time frame is shorter than for an outlook. If you see a review or watch designation, read the explanation, because it names the event that triggered it.

The date matters more than it appears. A rating is a snapshot. If the announcement you are reading is a year old, treat it as old. The insurer's own investor page, its ratings page and the agency's website normally show the current rating with the latest date. Our profile pages give ratings with dates, and the life insurer comparison tool can help you set two companies side by side, but the agency is the primary source.

Line 3: which companies are rated

This line is easy to skip and costly to miss. Ratings apply to legal entities, and a large insurance group may include several companies with different grades. A group might have a parent that sells the product in 49 states and a separate subsidiary that sells it in New York, and each subsidiary may be rated on its own or by reference to the group.

When you check a rating, check it for the company that issued your policy. The legal name is printed on the policy's first page and on the annual statement. If the rating release lists "Example Mutual Life Insurance Company" and your policy says "Example Life of New York," confirm that the second is among the rated entities. Some groups share a rating across pooled companies, and others rate subsidiaries one notch lower than the parent. The release says which.

A related point: a rating on a holding company's debt is not the same as an insurer financial strength rating. The financial strength rating concerns the insurance company's ability to pay policyholders. The holding company's debt rating concerns a different obligation. Both can appear in the same announcement, so be sure you are reading the line for the insurer. Agencies also assign a related issuer credit rating on a separate scale, so a release may list two ratings for one entity.

Lines 4 to 7: the rationale

The paragraphs after the grade explain why the agency chose it. Agencies group their analysis a little differently, but the common building blocks are the strength of the balance sheet, the quality and stability of earnings, the company's business position and the way it manages risk. AM Best, for example, describes its rating as resting on balance sheet strength, operating performance, business profile and enterprise risk management. The others use different categories that cover much of the same ground.

Balance sheet strength (line 4)

This is the section most relevant to a policyholder, because it asks whether the company has enough assets to pay what it owes. Look for four things.

1. Capitalization. The release may refer to a capital adequacy measure and say whether it is "very strong," "strong," or weaker. Regulators run a related test, described in the guide on risk-based capital and life insurer solvency. A high capital level means a larger cushion against losses.
2. Reserves. The money an insurer sets aside for future claims is called its reserves. Statements such as "conservative reserving" or "reserve adequacy" are about whether that money is likely to be enough. The accounting used to report it follows statutory rules; see statutory accounting.
3. Investments. The release usually describes what the company owns. Investment-grade bonds are more predictable than private credit, real estate and other assets that are harder to sell quickly. The phrase "modest allocation" is not a warning by itself, but "rapid growth in illiquid assets" often appears among the weaknesses. See how life insurers invest your premiums.
4. Reinsurance. A company that passes some of its risk to other insurers depends on those partners to pay. Look for any note about the amount ceded and about reinsurers' credit quality. reinsurance: the insurers behind your insurer covers the basics.

Operating performance (line 5)

Operating performance asks whether the company earns money steadily. A company with stable profits can absorb a bad year. The release may mention drivers such as investment income, mortality results and expenses, which are the same three streams that drive a dividend in a participating policy. It may also mention a drag, such as higher claims, guaranteed products that cost more than expected or a closed block that is running off. See reading a life insurer's earnings report for the financial statements behind these words.

Business profile (line 6)

This section looks at the company's position in its markets: size, product mix, distribution and how dependent it is on one product or one sales channel. A diversified insurer is less exposed to a bad turn in a single market. A smaller insurer concentrated in one product may carry a lower grade even with strong capital, because the agency sees less room for error.

Enterprise risk management (line 7)

Risk management covers how the company identifies, measures and limits risks such as interest rates, credit losses, catastrophes, liquidity and operations. The assessment is qualitative, and the common results are phrases like "appropriate," "strong" and "weak." A weak risk management assessment is worth noticing even when the other lines are strong.

Lines 8 and 9: what would change the rating

These are among the most useful lines in a release, because they say in plain terms what the agency is watching. The sample lists three things that could cause a downgrade: weaker capital, more illiquid investments and reinsurance arrangements that reduce control. If those factors begin to appear in later news about the company, the listed concerns become more relevant than the current letter.

Rating drivers tend to repeat across releases. If the factors that could lead to a downgrade are the same year after year, and the company continues to hold its grade, the risk is probably stable. If a new factor appears, such as a pending acquisition or a large block transaction, the agency is flagging a change.

An upgrade line saying "not applicable" is common at the top of the scale, where there is nowhere to go. For a lower grade, the upgrade factors show what the company must do to improve.

What a rating does not say

A rating can be accurate and still leave out much of what a policyholder cares about.

• Claims handling. It does not measure how quickly or fairly a company pays. For that, look at complaint data and the research in The NAIC complaint index and how to use it.
• Price and product quality. A highly rated company can charge more or offer a weaker product than a lower-rated one.
• Timing. Ratings lag events. An insurer can run into trouble faster than the agency's scheduled review. Agencies do act between reviews, but not instantly.
• Certainty. No grade is a promise. The guide on what happens if your life insurance company fails explains the court process and the state guaranty protection behind it.

Treat the letter, the outlook and the factors as a set of facts, not a score. And treat all of it as one input alongside price, product and service.

Two invented readings, side by side

Seeing two cases next to each other helps. Both are fictional.

Case one. An insurer's release says the rating is affirmed, the outlook is stable, the rated entities include the company on your policy and the downgrade factors are the same three that appeared the year before. Nothing here asks you to act. The routine response is to note the date and move on, and to look again at the next annual review.

Case two. A different release says the rating was affirmed, but the outlook was changed from stable to negative. The rationale describes strong capital but notes rapid growth in private credit and a large reinsurance transaction with an affiliate. The downgrade factors now include those two items. The grade is unchanged, so a headline search would show no news. A careful reader sees that the agency has moved the company one step toward a downgrade and has named the reasons. That reader might look at the company's financial statements, read its own commentary, check the state guaranty limits for the amount of coverage held and watch for the next announcement. A policy is rarely worth abandoning on this signal alone, particularly if replacing it would mean new underwriting at an older age, but the signal is worth following.

The difference between the two cases is not the letter. It is the direction and the reasons, and both live below the headline.

A reading routine for the next rating release

Next time you see a rating announcement for your insurer, run through these questions.

1. What is the action: affirmed, upgraded, downgraded or assigned? What is the date?
2. Is the entity named the same as the one on my policy?
3. What is the outlook? Is any review or watch designation attached?
4. In the rationale, which of capitalization, earnings, business profile and risk management is described as strongest, and which as weakest?
5. What are the stated factors that could lead to a downgrade? Are any of them appearing in current news?
6. Do other agencies agree? A difference of one notch between agencies is common. A larger gap is worth a question.

If the answers are reassuring, there is nothing to do except note the date. If they are not, see the next step in should you leave your insurer after a ratings downgrade?, and consider the state's guaranty association limits for the amount you own. The companion post on reading an insurer's strength without being an analyst, reading an insurer's financial strength without being an analyst, takes a shorter route.

Key takeaways

• Read past the letter: the action, the outlook, the date and the list of rated entities tell you whether the grade is fresh, which way it is leaning and whether it applies to your policy's issuer.
• The rationale breaks into balance sheet strength, operating performance, business profile and risk management; capital, reserves, investments and reinsurance are the parts closest to your policy.
• The lines on what could cause a downgrade are the best guide to what the agency is watching; compare them with news about the company.
• A rating is an opinion about the company's ability to pay, not a measure of claim handling, price or product quality, and it lags events.
• Check each rating against the legal name on your policy, and keep the date with it.