A.M. Best ratings evaluate insurance companies' financial strength — here's what you need to know about these scores

A.M. Best is a credit rating agency that began reviewing insurance companies back in 1899. Issued annually, its grades illustrate an insurer's ability to pay out on claims and meet other financial obligations.

CNBC Select often uses A.M. Best's ratings to help determine the best insurance companies in manydifferentcategories.

Here's what you need to know about A.M. Best ratings, including what they rank, how grades are determined and how you can use them when shopping for insurance.

Find the best auto insurance

An insurer has to be financially healthy to be able to pay out claims. As an independent credit rating agency, A.M. Best translates balance sheets and other data into letter grades that can be understood by consumers, investors and others in the insurance industry.

A.M. Best reviews and rates over 16,000 insurance companies globally, from household names to niche providers. Grades range from A+ to D, and each grade may also have a notch (or an additional "+") to indicate its strength within that grade. For example, an A+ company with an outstanding ability to meet its obligations would be categorized as A++.

A.M. Best's grades are relevant to all kinds of insurance. A life insurance policy, for example, may not pay out for decades. So it's important for a life insurance company to be in good financial standing for the long haul.

Northwestern Mutual, New York Life and MassMutual all received A++ ratings from A.M. Best in 2023.

There are also companies that issue homeowners and auto insurance policies with A++ ratings, including State Farm, Geico, Travelers and USAA.

A.M. Best grades insurers' credit in several categories, including their ability to meet their short- term, long-term and ongoing financial obligations. It's best known for its financial strength ratings (FSRs), however, which look at a company's ability to meet all of its policy and contract obligations.

According to A.M. Best, the ratings are predictions based on balance sheet strength, performance, business profile information and other data. As such, they're not a guarantee of future performance or meant as investment advice.

To calculate ratings, A.M. Best says its analysts make "quantitative and qualitative evaluations of balance sheet strength, operating performance, business profile and enterprise risk management"and bring their findings to a committee, which votes on a rating recommendation.

A.M. Best grades insurance companies on financial health by assigning them letter grades ranging from A+ to D. These grades can also include a notch to further distinguish financial strength within a grade.

An A+ company with superior financial strength, for example, would be graded as A++. And a B company with less solvency could be graded as B-.

These are the grade categories, based on A.M. Best's belief in a company's ability to meet ongoing obligations.

• Superior: Rating: A+, Notches: A++
• Excellent: Rating: A, Notches: A-
• Good: Rating: B+, Notches: B++
• Fair: Rating: B, Notches: B-
• Marginal: Rating: C+, Notches: C++
• Weak: Rating: C, Notches: C-
• Poor: Rating: D

An Under Review modifier, or "U," may also be added to a company's grade if there is a potential for a near-term change to its score, usually within the next six months. The Under Review marker can imply positive or negative results.

• Under review with positive implications: There is a reasonable likelihood the grade will be raised as a result of recent information.
• Under review with negative implications: The company is facing unfavorable financial or market conditions and has a good possibility of a rating downgrade.
• Under review with developing implications: There is still uncertainty as to the outcome of the review.

FSRs distill a lot of financial information into an accessible format, providing an important metric you can use to evaluate an insurance company.

• To ensure a score is current and accurate, get it from the A.M Best website directly.
• Major carriers like State Farm and Allstate have numerous subsidiaries for property, auto and other insurance categories and A.M. Best grades each separately. Make sure you're looking at the right one.
• Look beyond the score to the factors that led A.M Best to give a company its grade and notch to see if they concern you.
• Review an insurer's grade over time for an idea of its long-term financial health.
• Look at scores from other credit rating agencies for comparison, including S&P Global and Moody's.

FSRs shouldn't be the sole reason to purchase or switch to a particular carrier, especially since they don't consider rates and terms for a specific policy. They also don't address customer satisfaction — the National Association of Insurance Commissioners' Complaint Index, J.D. Power's customer satisfaction ratings and the Better Business Bureau's grades are more helpful there.

Shop for your next homeowners insurance policy

A.M. Best creates ratings for the insurance industry, including a measure of a company's ability to pay claims and meet financial obligations, called its financial strength rating. It's another factor you can use to decide which insurance company is a good fit for you.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurancereview is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insuranceproducts. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.