Based out of New York and London, Fitch Ratings is one of three bond rating agencies recognized as nationally recognized statistical rating organizations (NRSRO) by the U.S. Securities and Exchange Commission. You’ll likely encounter its name when you check for the financial stability of an insurance company. They take on the task of making this assessment.
From The Top: Who Is Fitch?
Fitch Group specializes in financial information services. It includes Fitch Ratings, Fitch Solutions, BMI Research, and Fitch Learning. Each sector plays a specific role in financial analysis. It encompasses credit ratings, risk services, and financial data to guide investors and helping individuals assess the financial health of potential insurance companies.
For insurance purposes, Fitch Ratings will provide the greatest assistance. You may be familiar with other independent analysts who assume a similar role such as:
Each one has its own criteria and methods for determining the financial health of a company. Taken as a whole, you can get an accurate assessment of an insurer.
With Fitch Ratings, one its main concerns is the responsiveness to the economy. It considers whether changes in the economic sphere will impact an insurance company’s ability to meet its financial obligations—including the claims of policyholders. You’ll find both short- and long-term credit ratings for assessing a company’s ability to pay and to yield a return for investors.
How Fitch Ratings Work
Fitch Ratings arrives at its grade after comprehensive research into an insurance company. It considers many factors including its historical performance, responsiveness to economic trends, and management style. It’ll also tap into public financial data. Once it has made its assessment, a company receives a rating based on a simple alphabetic scale from ‘AAA’ to ‘D.’
Here is a chart of all the short and long term ratings from Fitch Ratings:
|Long Term||Short Term|
|A+||F1 or F1+|
|A-||F2 or F1|
|BBB||F3 or F2|
This scale is used for long-term ratings. Each one conveys the essential information. For example, AAA, its highest rating, means an insurance company can meet its financial obligations, and it won’t be severely impacted by economic conditions. This signifies a company who is financially secure in the opinion of Fitch Ratings and a safe risk.
It’s worth noting the increasing economic impact down the sliding scale. Going from AA to A means a company is vulnerable to adverse market conditions. And while you may think B signifies something good, it means a risk of not meeting its financial obligations with a rating designated as weak. A C rating means imminent problems with little faith in recovery.
For these ratings, Fitch uses a different scale includes F1, F2, F3, B, and C. F1 through F3 rank an insurance company’s ability to meet short-term financial obligations going from very capable to adequately able. B and C both indicate weak abilities with C meaning a very weak outlook. Taken together, both short- and long-term ratings provide an overall assessment.
Getting the Most Value Out of Fitch Ratings
It’s essential to remember several important caveats when using Fitch Ratings or any other independent analysis when making judgments about an insurance company. First, bear in mind a rating isn’t a prediction; it’s an opinion, albeit, an educated one. Second, each of the primary NRSROs has its own system, guidelines, and criteria, and thus, its ratings.
This means you may see differing opinions and ratings among them. Insurance companies know these ratings are crucial to their profitability as they can direct impact consumer confidence. This means they are responsive to what these analyses show. While it’s wise to consult these ratings, you should base insurance decisions on multiple criteria and opinions.
Fitch Ratings is one of several independent financial analysts providing informed market data to guide both investor and individual decisions. It considers both an insurance company’s capability to meet financial obligations and its ability to weather changing economic conditions. It is one of many tools you can use to choose the right insurance company for you and your specific needs.