Ratings users unaware of big differences between Fitch and AM Best

Fitch Ratings has released a report which details the differences and lack of comparability between its own insurance financial strength (IFS) ratings and those of AM Best – in particular at the 'A-' level.

The rating agency said it believes there are common misperceptions with respect to the comparability of IFS ratings, especially at this level specifically. “We believe most IFS ratings users are either simply not aware that such differences exist, or if they are aware, they are not appreciative of the magnitude of the differences,” Fitch said.

It said that it believes that an IFS rating of 'A-' from AM Best is most comparable with a 'BBB' IFS rating from Fitch, as well as Moody's and Standard & Poor's (S&P).

In the report, Fitch provided anecdotal evidence that it believes demonstrates a lack of ratings comparability. It is most apparent with newly formed companies, insurers located in countries with high country risks, captives and smaller insurers, it said.

It has also completed a historical statistical ratings performance in the report comparing default and impairment rates by rating category (over a 25- to 37-year period), using data reported to regulators, which it said also illustrates this difference.

“We believe the lack of ratings comparability reflects a combination of differences with respect to how certain risks are weighed in the respective credit rating agencies’ ratings criteria, and the fact that the IFS ratings scale used by AM Best does not directly map to the rating scales used by the other noted credit rating agencies,” the report said.

“Based on our findings, IFS ratings users that treat the 'A-' IFS ratings of all four CRAs as directly equivalent are misestimating credit risk and, therefore, should consider adjusting their ratings standards accordingly.

“Specifically, Fitch believes the equivalency should be changed to 'BBB' for Fitch, as well as Moody's and S&P, and retained at 'A-' for only AM Best. This also coincides with how capital markets view debt ratings, where debt ratings in the 'BBB' category (and above) are considered investment grade.”

Fitch also stressed that its findings do not suggest that AM Best's approach is wrong. Rather, it suggests that AM Best's approach is different, and that this difference, in turn, makes AM Best's ratings less comparable with those provided by Fitch and the other credit rating agencies.