Understanding Insurance Financial Strength Ratings

When shopping for car insurance, it's tempting to pick the cheapest policy and call it a day. But price is only half the equation. The other half — one most consumers overlook — is whether your insurer can actually pay your claim when you need it most. That's exactly what financial strength ratings measure.

Three major agencies — AM Best, Standard & Poor's (S&P), and Moody's — independently evaluate insurance companies and assign ratings that reflect their financial health. Each uses its own methodology and scale, but they all answer the same core question: How well-positioned is this insurer to meet its obligations to policyholders?

The Three Major Rating Agencies Explained

Here's a side-by-side breakdown of how each agency's rating scales compare:

AM Best (The Insurance Specialist)

AM Best has been rating insurance companies since 1906, making it the oldest and most specialized rating agency in the industry. Their 16-level scale runs from A++ (Superior) all the way down to F (In Liquidation). For most consumers, any rating of A- or better is generally considered solid ground. Ratings are searchable for free at ambest.com. Companies rated below B++ carry significantly higher impairment risk, so sticking to A-rated carriers matters when you shop for car insurance.

S&P Global Ratings

S&P uses a 22-level scale, with AAA as the gold standard and D indicating default. Their ratings focus on an insurer's capacity to meet ongoing policyholder obligations. An S&P rating of A- or higher is widely considered financially sound for a personal lines insurer. Notably, S&P downgraded State Farm General Insurance Company (California) to A- (stable outlook) in August 2025, reflecting weakening balance sheet conditions separate from the parent group.

Moody's

Moody's evaluates insurers using a 21-level scale from Aaa down to C, with numeric modifiers (1, 2, 3) within each letter category. Their methodology closely mirrors bond rating systems and focuses on the insurer's ability to pay senior policyholder claims on time.

How Top Insurers Currently Rate

Here's where several major U.S. auto insurers stand as of early 2026. Note that State Farm was downgraded from A++ to A+ (Superior) by AM Best in November 2025, following five consecutive years of underwriting losses driven by elevated auto and homeowners claims costs, inflation, and catastrophic weather events — including hurricanes, wildfires, and convective storms.

What Happens If Your Insurer Goes Bankrupt?

An insurance company going insolvent isn't just a theoretical risk — it happens. In 2025, U.S. insurance receiverships doubled to 10 cases from five in 2024, with eight involving property/casualty insurers — six liquidations and two rehabilitations. The combined net assets of companies placed into receivership totaled $275.4 million in 2025. When an insurer becomes financially unable to meet its obligations, it enters court-ordered liquidation, operations are halted, and claim payments can be delayed or reduced. AM Best assigns an "F" rating to companies in liquidation.

For policyholders, the consequences can be serious:

• Pending claims may be delayed for months or even years
• New claims may receive reduced payouts or none at all beyond guaranty fund limits
• Active policies may be cancelled, forcing you to scramble for new coverage
• Any amounts above guaranty fund caps become general creditor claims against the insolvent insurer's remaining assets

On the positive side, 2025 saw AM Best upgrades outnumber downgrades for the first time since 2021 — with affirmations rising to 83.9% of all rating actions (up from 77.7% in 2024) — and the industry combined ratio hit 89%, the lowest since at least 2001, reflecting improved underwriting discipline. The U.S. P&C industry posted a net underwriting gain of approximately $61 billion, nearly tripling 2024's $22 billion. However, personal lines segments, including personal auto and homeowners, still accounted for most downgrades due to inflation, elevated catastrophe losses, and rising reinsurance costs.

That divergence is a reminder that the insurance market has clear winners and losers, and picking the wrong carrier can cost you. Review our guide on what to look for in car insurance to build a complete evaluation framework before you buy.

State Guaranty Funds: Your Safety Net (With Limits)

Every U.S. state — plus Washington D.C. — has a state guaranty association that steps in when a licensed insurer becomes insolvent. These associations are funded by assessing premiums against other healthy insurers operating in the state, which may then pass those costs to policyholders.

Here's how typical coverage limits break down for life and health lines (property/casualty limits vary by state):

Important: For auto insurance (property/casualty), your state's guaranty fund operates separately from life/health associations. Most states cover auto claims between $100,000 and $300,000 per claim, but limits vary considerably. Check your state's Department of Insurance website or ncigf.org for exact figures.

Warning Signs of a Financially Troubled Insurer

You don't need a finance degree to spot red flags. Here are the signals that warrant a closer look before you commit to a policy. You can also review our guide on researching car insurance reputation for a deeper framework on vetting insurers.

1. Premiums Far Below the Competition

If a quote is more than 15–20% lower than comparable coverage from other reputable insurers, that's a warning sign. Insurers price policies based on actuarial data — a company pricing significantly below market may not have the reserves to cover future claims.

2. Declining Financial Ratings

A recent downgrade from AM Best, S&P, or Moody's is a serious red flag. Even if a company still holds a passing grade, the direction matters. State Farm's November 2025 downgrade from A++ to A+ — triggered by five consecutive years of underwriting losses from elevated loss ratios in private passenger auto and homeowners lines, regulatory challenges, and weather-related losses — is a high-profile reminder that even the largest insurers aren't immune to rating pressure.

3. High NAIC Complaint Ratios

The National Association of Insurance Commissioners (NAIC) publishes complaint ratio data for every licensed insurer. A ratio significantly above 1.0 may indicate systemic claim-handling issues. Auto insurance complaints rose 7.5% in 2025 (35,063 total, up from 32,578 in 2024), continuing a troubling trend. You can look up any insurer's complaint data free at naic.org/cis.

4. Runoff Status or Halted New Policies

Companies that stop writing new business — known as entering runoff — signal an inability to sustain normal operations. This was a key warning sign preceding several of the 2025 receivership cases. Regulators expect insolvency risks to continue rising in 2026.

5. Aggressive or Pressure-Based Sales Tactics

Insurers urging you to buy immediately — especially with threats that prices are about to jump — may be prioritizing cash flow over your best interest. Reputable companies don't pressure you. Alongside this, be wary of companies that are slow to provide policy documents, insurance ID cards, or verifiable contact information.

6. No Rating From Any Major Agency

Financial strength ratings are voluntary, so some companies choose not to be evaluated. While the absence of a rating doesn't automatically mean a company is unsafe, it does remove an important layer of independent verification. If a carrier has no rating from AM Best, S&P, or Moody's, investigate through your state's Department of Insurance before buying.

Balancing Price with Financial Strength

Here's the honest truth: a cheap policy from a financially weak insurer isn't a bargain — it's a liability. But that doesn't mean you have to pay top dollar to be safe. There are plenty of financially sound insurers that are also competitively priced. The key is knowing how to filter your options.

Practical Steps to Find the Best Value

1. Set a floor of A- (AM Best) or A- (S&P) as your minimum acceptable financial strength rating before comparing prices.
2. Get at least three to five quotes from companies that meet that floor — you'll be surprised how much prices vary among stable insurers. Our best car insurance companies guide breaks down the top-rated options side by side.
3. Factor in discounts — many financially strong insurers offer significant savings for bundling, safe driving, or good credit. Check our guide to comparing car insurance companies, which covers AM Best ratings, J.D. Power scores, and NAIC complaint ratios together.
4. Consider usage-based programs — telematics programs from major, financially stable carriers can meaningfully reduce your premium. Look for programs from A++ rated carriers like GEICO and USAA to get the best of both worlds.
5. Re-evaluate annually — ratings change, and so do your options. In 2025, AM Best issued upgrades that outnumbered downgrades for the first time since 2021, but personal lines remained the most volatile segment. The best deal this year might not be the best deal next year. Also consider how state insurance rate regulation in your state may affect your options and what insurers are available to you.

Frequently Asked Questions

What is the best AM Best rating an insurance company can receive?

The highest AM Best rating is A++ (Superior), which signals the strongest ability to meet ongoing policyholder obligations. Very few insurers achieve this top rating — companies like GEICO (Berkshire Hathaway), USAA, and Travelers are among the select group that currently hold it as of 2026. Note that State Farm, historically an A++ carrier, was downgraded to A+ (Superior) in November 2025 following years of underwriting losses tied to auto, homeowners, and weather-related claims. For most consumers, any rating of A- or higher is considered financially solid and appropriate for purchasing coverage.

Are insurance companies required to be rated by AM Best or S&P?

No — financial strength ratings are voluntary. Insurers choose whether to be evaluated by rating agencies. A company with no rating isn't automatically unsafe, but the absence of a rating from any major agency should prompt further research through your state's Department of Insurance to verify the company's financial standing and licensing status.

If my insurance company goes bankrupt, will I still be covered?

You'll have some protection through your state's guaranty association, which steps in to cover certain claims up to defined limits — typically between $100,000 and $300,000 per claim for auto insurance, depending on your state. However, payouts can take time, and amounts above the cap may not be fully recovered. U.S. insurance receiverships doubled to 10 cases in 2025 — with 8 liquidations — a reminder that this is a real risk. This is why it's critical to choose a financially healthy insurer rather than relying on the guaranty fund as a fallback.

How often should I check my insurer's financial strength rating?

It's a good habit to check your insurer's rating at least once a year, especially at renewal time. Rating agencies continuously review and update their assessments — in 2025, AM Best affirmations rose to 83.9% of all rating actions, but personal lines carriers saw the most volatility in downgrades. Checking takes only a few minutes at ambest.com and could save you from a major headache later.

Does a higher financial strength rating mean better customer service?

Not necessarily. Financial strength ratings measure solvency and claims-paying ability — they don't evaluate how quickly claims are processed, how helpful agents are, or how easy the company is to work with. For a complete picture, pair financial ratings with NAIC complaint ratios and third-party customer satisfaction scores from sources like J.D. Power. Our guide on car insurance company reputation and reviews walks you through how to evaluate both dimensions together.