Fitch Ratings | What They Are, And How To Use Them

by Jeff Rose on January 5, 2018 · 0 comments

in Life Insurance Company Reviews

When you’re shopping around for life insurance, there are dozens of factors you need to consider to ensure you’ve made the best choice for you and your loved ones. Life insurance is one of the most important safety nets you’ll ever purchase, and it’s a long-term investment you shouldn’t make quickly.

One factor you need to consider is the rating and stability of the company. One of the worst things which could happen is for you to purchase a life insurance policy and the provider go belly up. While you can’t predict the future, there are some tools you can use to judge the stability of a company.

One of those tools is the Fitch insurance company rating system.

History of Fitch

fitch ratings logoThe Fitch rating system goes back 100 years, all the way back to 1913. The Fitch Publishing Company was created by John Knowles Fitch, he published statistics to use in the investment industry.

He published them in “The Fitch Stock and Bond Manual” and “The Fitch Bond Book.” In 1923, he decided to add a detailed rating system, the AAA through D, which is still used today.

In 1990, Fitch combined with IBCA of London, which is a subsidiary of a French holding company.

They also brought in a few competitors, Thomas Bankwatch and Duff & Phelps Credit Ratings Co. Through the years, they have drastically grown, and have become one of the largest third-party rating companies on the market.

What is the Fitch Rating System?

The original purpose of these rating systems was designed for investors.

The goal of the ratings was to give investors an idea of the financial stability and give them an idea of how risky of an investment it would be. These ratings are not only good for investors, but they can also be handy for customers looking for a solid insurance company.

Why are these ratings important? When you buy life insurance, more than likely, it’s going to be a 20-year investment. If you buy a whole life insurance plan, you could hold a policy for 60 or 70 years.

A lot of things could change in 70 years. What would happen if the insurance company went bankrupt after 50 years? The worst possible outcome is for your loved ones to try and claim the life insurance policy, only for the company to not have the funds to pay out.

When evaluating a company, The Fitch Rating Group uses some criteria which includes several different factors when determining the grade. Some of those factors are financial assets, management style, historical performance, and much more. They will use data from insurance companies, financial reports, and medical underwriters.

The ratings essentially shows the company’s credit quality and ability to pay its debts.

What do the Fitch Ratings Mean?

When you’re comparing companies, it’s important you look at the financial ratings. Fitch is one of the largest and most well-trusted. It’s easy to find the rating for just about any insurance company out there, but what do those ratings mean?

Their ratings are broken into two separate categories, short-term ratings, and long-term ratings.

As you can probably guess from the name, these are used for investors or customers looking to make longer or shorter investments. Additionally, there could be an insurance company you find that is “not rated,” that doesn’t mean the company is unstable, it only means Fitch was not able to complete an evaluation.

AAA: This is the highest rating handed out by Fitch. Companies that have received this honor have shown to be the most stable. If you’re considering a company with an AAA rating, you don’t have to worry about the financial security of this company. More than likely, an AAA company will be open for many years to come.

AA: While not the highest rating out there, companies with an AA rating have shown strong financial foundation and excellent leadership management. These companies are shown to be “very strong.”

A: An A rating is a “strong” rating, and they have shown great financial history and have performed well in the past. Companies with an A rating are financially stable, but they would be more vulnerable to economic downturns.

BBB: This is when companies are currently doing well but could experience problems in the future if the economy tanked. BBB is considered a “good” rating, and they are meeting all of their financial obligations. You shouldn’t necessarily avoid any BBB rated companies, but be aware of the possible outcome.

BB: This is the point you should start being wary of any companies with BB ratings or below. These companies are extremely vulnerable to any changes in the market, which could make them struggle to make their obligations. Unless they make serious changes, it’s better to find a company with stronger ratings.

B: B is a “weak” rating. Based on the Fitch criteria, these companies are likely to have problems meeting financial obligations and paying out the policies.

CCC: This is the start of the danger zone. CCC is the “very weak” category. Anyone with these rates face a strong chance of falling short in their finances.

CC: “Extremely weak” is the second to worst possible rating a company could receive. Applicants should be worried about not receiving payouts from policies from these companies.

C: This is the worst possible rating a company could receive from Fitch. Anyone in this category has reached the “distressed” level. The rating says it all. They have a strong chance of not being able to make end’s meat and have a low likelihood of making a recovery.

Using these Ratings

The Fitch Rating shouldn’t be your end-all-be-all for finding the best company. There are dozens of other factors you’ll need to add in your search, but it’s important you look at their credit rating when trying to decide which company is best for you.

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