How to Master Am Best Rating Nonadmitted Carriers in Your Agency

AM Best rating nonadmitted carriers is the foundation of surplus lines placement decisions for every broker writing specialty commercial, E&S property, or specialty liability business. AM Best rates over 3,500 insurance companies worldwide, and their Financial Strength Rating (FSR) serves as the primary placement eligibility benchmark for nonadmitted carriers across 48 states. In 2025, 92% of U.S. surplus lines premium was placed with carriers rated A- (Excellent) or better, according to AM Best 2025 surplus lines market data. AM Best issued 23 downgrades and placed 8 additional nonadmitted carriers under review with negative implications during 2025. Brokers who understand how AM Best assigns, maintains, and changes these ratings hold a measurable advantage in protecting clients and managing agency E&O exposure.

Key Takeaways

• AM Best's FSR scale has 15 categories from A++ (Superior) to F (In Liquidation), but 97% of surplus lines premium concentrates in just 5 categories: A++, A+, A, A-, and B++, per AM Best 2025 surplus lines market data
• The FSR and the Issuer Credit Rating (ICR) are two distinct AM Best ratings: the FSR measures ability to pay policyholder obligations, while the ICR measures creditworthiness for debt obligations; brokers use the FSR for placement decisions
• AM Best 2024 Rating Transition Study data shows that 68% of nonadmitted carriers placed on negative outlook experience an actual FSR downgrade within 18 months of the outlook assignment
• Several U.S. states impose minimum AM Best FSR requirements by statute or regulation for surplus lines carrier eligibility: California, Texas, Florida, and New York each maintain specific financial standards that reference or parallel the AM Best scale
• Alien insurers including Lloyd's of London syndicates receive AM Best ratings through the same analytical framework applied to domestic carriers; Lloyd's carries an A FSR as of 2025
• AM Best published 142 rating actions (upgrades, downgrades, affirmations, and reviews) on nonadmitted carriers in 2025, making rating monitoring a continuous obligation rather than an annual task

Understanding AM Best's Two Primary Rating Systems

AM Best publishes two distinct rating products. Brokers and compliance officers need to know which one applies to placement decisions and which one does not.

Financial Strength Rating (FSR). The FSR reflects AM Best's opinion of a carrier's ability to meet its ongoing policyholder obligations. This is the rating that matters for surplus lines placement decisions. The FSR scale runs from A++ (Superior) at the top to F (In Liquidation) at the bottom, with D (Poor) and E (Under Regulatory Supervision) at the lower end. When a state regulation, an E&O policy condition, or an industry standard references an "AM Best rating," they are referring to the FSR.

Issuer Credit Rating (ICR). The ICR reflects AM Best's opinion of a carrier's creditworthiness for debt repayment purposes. It is expressed on an alphanumeric scale (aaa, aa+, aa, aa-, a+, a, a-, bbb+, bbb, bbb-, etc.) rather than the letter-plus-symbol FSR scale. Carriers that issue surplus notes, bonds, or other debt instruments carry ICRs. The ICR is not the appropriate metric for surplus lines placement eligibility. A carrier can hold an adequate FSR while carrying a lower ICR if its debt structure is complex.

How the two ratings relate. AM Best generally aligns the two ratings, but they are independent assessments. An FSR of A typically corresponds to an ICR of a to a+. An FSR of A- typically corresponds to an ICR of a-. However, discrepancies exist, particularly in holding company structures where the operating subsidiary carrier (which issues the FSR) differs from the holding company that issues debt (which carries the ICR).

When evaluating a nonadmitted carrier, always confirm you are reviewing the FSR for the specific legal entity issuing the policy, not the ICR for the holding company.

The Complete AM Best FSR Scale for Nonadmitted Carriers

The critical threshold between Secure and Vulnerable sits between B++ and B+. AM Best classifies A++ through B++ as Secure ratings, meaning the carrier has adequate financial strength for its obligations. B+ and below are Vulnerable ratings, meaning the carrier is susceptible to adverse business or financial conditions that could impair its ability to meet obligations.

This Secure/Vulnerable distinction carries regulatory weight. Some state regulations for surplus lines carrier eligibility specifically require carriers to hold Secure-category AM Best ratings.

How AM Best Assigns Ratings: The Five Building Blocks

AM Best's rating methodology evaluates five dimensions, weighted by their relative importance for the specific carrier being rated. Understanding this framework helps brokers interpret rating rationale and anticipate rating changes.

Building Block 1: Balance Sheet Strength. This is the foundation of every AM Best rating. It reflects the carrier's capital adequacy, quality of invested assets, and the structure of its reinsurance program. AM Best uses its proprietary Best's Capital Adequacy Ratio (BCAR) model to determine whether the carrier holds sufficient capital for its risk profile. The BCAR runs stress tests at multiple confidence levels. A carrier holding capital adequate at the 99.6% confidence level meets the threshold AM Best sets for an A rating at this building block.

Balance sheet strength also incorporates the quality of the reinsurance program. A carrier with strong gross capital but heavy reliance on poorly rated reinsurers receives a weaker balance sheet assessment because the effective net capital is lower than the gross capital suggests.

Building Block 2: Operating Performance. AM Best examines profitability trends over 5-year and 10-year periods. One bad year does not trigger a downgrade. Two consecutive years of combined ratios above 110% draws scrutiny. Three consecutive years of underwriting losses without offsetting investment income signals a structural problem. AM Best specifically evaluates whether the carrier's underwriting and investment results are sustainable given its business mix and competitive environment.

Building Block 3: Business Profile. This block assesses the carrier's market position, competitive advantages, geographic diversification, and distribution strategy. A nonadmitted carrier writing 80% of its premium in a single state or a single line of business has a weaker business profile than a diversified carrier. Market leadership in a specific niche can offset concentration risk if the carrier genuinely dominates that niche and faces limited competition.

Building Block 4: Enterprise Risk Management (ERM). AM Best conducts ERM assessments that evaluate the carrier's risk appetite framework, catastrophe modeling capabilities, stress testing processes, and risk culture. A carrier with sophisticated ERM - including realistic catastrophe PML calculations, active stress testing, and independent risk oversight - receives stronger ERM credit. Carriers with weak ERM, particularly in catastrophe-exposed lines, face downward pressure on this building block.

Building Block 5: Financial Flexibility. This block assesses the carrier's access to capital markets and holding company support. A carrier that is a subsidiary of a large, financially strong insurance group receives financial flexibility credit from parent company support. Berkshire Hathaway Specialty Insurance, Scottsdale Insurance (Nationwide), and Lexington Insurance (AIG) each benefit from parent financial flexibility that enhances their individual ratings. Standalone carriers without holding company support must demonstrate their own access to capital through lines of credit, surplus note programs, or other mechanisms.

How Rating Outlooks Work and Why They Matter

Every AM Best FSR comes with a forward-looking outlook designation: Positive, Stable, or Negative. AM Best also uses an "Under Review" status when it is reconsidering a rating within a shorter timeframe (typically 30 to 90 days).

Stable outlook. The rating is expected to remain unchanged over the next 12 to 24 months. No significant directional change in the carrier's financial condition or business profile is anticipated. This applies to approximately 82% of rated nonadmitted carriers based on AM Best 2025 data.

Positive outlook. An upgrade is possible within 12 to 24 months. The carrier is improving on one or more building blocks. Approximately 6% of rated nonadmitted carriers hold positive outlooks. A positive outlook is not a trigger for any placement action, but it is worth noting as evidence of financial trajectory.

Negative outlook. A downgrade is likely within 12 to 24 months. AM Best 2024 Rating Transition Study data shows that 68% of carriers placed on negative outlook experience an actual downgrade within 18 months. Approximately 12% of rated nonadmitted carriers hold negative outlooks. A negative outlook should trigger immediate action: stop writing new business with that carrier and develop transition plans for existing renewals.

Under review with negative implications. This is the strongest pre-downgrade signal AM Best publishes. It means AM Best is actively reconsidering the rating downward and expects to conclude the review within 30 to 90 days. During this period, treat the carrier as if it has already been downgraded. Pause new placements and accelerate renewal transitions.

Under review with positive implications. The opposite scenario: AM Best is considering an upgrade. This does not require any placement action but confirms improving carrier trajectory.

Which States Reference AM Best Ratings in Surplus Lines Regulations

Several states build AM Best rating requirements directly into their surplus lines statutes or regulations. Understanding state-specific requirements prevents regulatory violations that arise from placing with carriers that meet national standards but not the specific state standard.

California. California Insurance Code Section 1765 requires that surplus lines carriers meet financial standards specified by the California Department of Insurance. CDI regulations effectively require AM Best ratings of A- or better for most placements. The California Surplus Line Association (CSLA/SLAS) maintains eligibility data that reflects these standards.

Florida. Florida Statute 626.922 requires surplus lines carriers to meet minimum financial strength standards. The Florida Surplus Lines Service Office (FSLSO) maintains an eligibility list that incorporates AM Best rating thresholds. Florida's standards require a minimum of A- (Excellent) for most nonadmitted placements.

Texas. Texas Insurance Code Chapter 981 and Texas Department of Insurance rules require surplus lines carriers to meet financial standards administered by the Texas Surplus Lines Stamping Office (SLTX). Texas standards reference AM Best ratings and require documentation of financial strength for each carrier used.

New York. New York Insurance Law Article 21 and related regulations administered through the Excess Line Association of New York (ELANY) require surplus lines carriers to meet specific financial standards. New York's requirements include AM Best rating thresholds as part of the eligibility criteria.

Other states. Most remaining states require carriers to meet minimum financial strength standards without explicitly naming AM Best rating levels in statute. However, regulators in those states consistently interpret "adequate financial strength" to align with AM Best A- or better in enforcement actions. NAIC 2025 Market Conduct Annual Statement data shows that every examined state that took enforcement action for financial strength violations involved carriers rated below B++ or unrated at the time of placement.

Comparing Major Nonadmitted Carriers by AM Best Rating

These figures reflect AM Best 2025 data and publicly available statutory filings. Combined ratio figures represent five-year averages and may reflect favorable or unfavorable loss development in specific years.

What to Do When an AM Best Rating Changes

Rating changes require immediate, documented responses. The response protocol depends on the nature and direction of the change.

On a downgrade to B++ (Secure): Stop writing new business with the carrier on a standard basis. Conduct enhanced quarterly reviews. Notify the compliance officer. Present alternative markets to clients at their next renewal. Do not recommend new placements with the carrier to retail clients without disclosing the downgrade and its implications.

On a downgrade to B+ (Vulnerable): Stop all new placements immediately. Begin the transition process for all in-force policies. Notify all affected clients in writing within 30 days. Explain that the carrier no longer meets the agency's minimum placement standards and present alternatives at each renewal. Document every notification date and method.

On a downgrade below B+: Treat as a carrier failure scenario. Assess all in-force policies for potential midterm cancellation or non-renewal by the carrier. Notify clients of the rating status and the absence of guaranty fund protection. Escalate to agency ownership and E&O counsel.

On a negative outlook assignment (without downgrade): Stop new placements pending review. Brief the compliance officer. Set a 90-day internal review date. If the carrier resolves the negative outlook conditions within 90 days, resume placements with enhanced monitoring. If the carrier is downgraded or remains on negative outlook beyond 90 days, initiate transition.

On an upgrade: Document the improved rating. No operational action required, but update the carrier review file with the new rating and date.

Documentation for all rating changes. Record the date you learned of the rating change, the specific rating action, the actions you took in response, and the timeline for client notifications and transitions. This documentation is the first line of E&O defense if the carrier later becomes insolvent.

Setting Up AM Best Rating Alerts for Your Carrier Panel

AM Best provides email alert subscriptions through ambest.com. Setting up carrier-specific alerts is a five-minute administrative task that eliminates the risk of missing a rating action between annual reviews.

Navigate to ambest.com, create or log into a free account, and search for each carrier on your approved panel. On each carrier's profile page, subscribe to email alerts for that carrier. AM Best sends notification of rating actions, outlook changes, and under review designations within 24 hours of publication.

For agencies writing significant surplus lines volume, also subscribe to AM Best's news service for sector-level alerts that flag industrywide concerns before they manifest in individual carrier rating actions. A sector-wide alert about reserve adequacy in casualty lines, for example, triggers a proactive review of all casualty-focused carriers on your panel.

At minimum, maintain alerts for every carrier appearing on your approved non-admitted carrier list. Check the alert subscription list annually to add new carriers and remove carriers no longer on your approved list.

AM Best Ratings vs. Demotech Financial Stability Ratings

In the homeowners insurance market, particularly in catastrophe-exposed states like Florida, Louisiana, and Texas, Demotech Financial Stability Ratings (FSRs) are as operationally important as AM Best FSRs. Brokers placing coastal or wildfire-exposed homeowners risks for clients with conforming mortgages need to understand both rating systems.

Demotech FSR scale. Demotech rates smaller and mid-size homeowners carriers using a scale that runs A" (Unsurpassed) at the top, through A' (Unsurpassed), A (Exceptional), M (Moderate), L (Licensed), and S (Substantial). The practical minimum for mortgage-backed placements is A (Exceptional).

Fannie Mae and Freddie Mac requirement. Both government-sponsored enterprises require that homeowners insurance carriers on properties serving as collateral for conforming mortgages hold a Demotech FSR of A (Exceptional) or better. A carrier with an AM Best rating but no Demotech rating may not satisfy the mortgage lender's requirement for certain policyholders. A carrier with a Demotech A but no AM Best rating requires independent ratio analysis using statutory financials.

When both matter. When placing coastal homeowners coverage for a policyholder with a conforming mortgage, check both AM Best and Demotech. Many carriers in the Florida, Louisiana, and Texas E&S homeowners market carry Demotech ratings but not AM Best ratings, because their business concentrates in a size and geographic niche that Demotech serves better than AM Best's general framework.

When AM Best alone is sufficient. For commercial property, casualty, professional liability, and other non-homeowners surplus lines placements, AM Best FSR is the applicable standard. Demotech is primarily relevant for personal lines homeowners placements in catastrophe-exposed markets.

How to Interpret AM Best Downgrade Rationale

When AM Best downgrades a nonadmitted carrier, they publish a press release and updated analytical commentary explaining the rationale. Reading and retaining this rationale is a required step in the post-downgrade response process.

Common downgrade rationales and what they signal:

Reserve inadequacy: AM Best found that the carrier's loss reserves were materially understated relative to the actual development of losses. This is the most serious rationale because it means the carrier's stated surplus overstates its actual financial position. The degree of reserve deficiency relative to surplus indicates how impaired the carrier actually is.

Operating performance deterioration: The carrier's combined ratio trended above AM Best's thresholds for the current rating level over multiple periods. This rationale indicates a structural profitability problem, not a one-time event. The question is whether the carrier can restore underwriting discipline without further surplus impairment.

Catastrophic loss event: A single large event impaired the carrier's surplus. Review the AM Best commentary for the degree of surplus impairment and the carrier's post-event capital position. A carrier that absorbed a catastrophic loss but maintained its capital above rating thresholds may recover quickly. A carrier that absorbed the loss and exhausted its surplus buffer faces a longer recovery path.

Reinsurance collectability problems: The carrier's reinsurance recoverables proved uncollectable, reducing effective surplus below rating thresholds. This rationale often indicates broader structural problems with the carrier's reinsurance program design and counterparty selection.

FAQ

What is the difference between AM Best FSR and ICR for nonadmitted carriers?

The Financial Strength Rating (FSR) measures the carrier's ability to pay policyholder claims. It runs on a letter-plus-symbol scale from A++ to F. The Issuer Credit Rating (ICR) measures the carrier's creditworthiness for repaying debt obligations. It runs on an alphanumeric scale (aaa, aa+, aa, etc.). Brokers making surplus lines placement decisions use the FSR, not the ICR. The ICR is relevant to investors in carrier-issued bonds or surplus notes, not to policyholders or placing brokers. When a state regulation or agency E&O policy condition references an "AM Best rating," it means the FSR. Always confirm you are reviewing the FSR for the specific legal entity issuing the policy.

What AM Best FSR is required for surplus lines placement in most states?

The widely accepted industry standard and the threshold used by most agency E&O underwriters is A- (Excellent) or better with a stable or positive outlook. AM Best 2025 data shows 92% of U.S. surplus lines premium is placed with carriers at this threshold or above. California, Florida, Texas, and New York each have specific regulatory financial standards that align with or parallel the A- threshold. Most remaining states do not name a specific rating level in statute but enforce financial adequacy standards that regulators interpret as requiring Secure-category ratings (B++ or better) at minimum. Agencies should apply the higher of their E&O underwriter's stated standard and the placement state's regulatory standard, which in most cases means A- or better.

How does AM Best rate Lloyd's syndicates versus domestic nonadmitted carriers?

AM Best rates Lloyd's of London as a market with a single FSR (A, Excellent as of 2025) that applies to the Lloyd's market as a whole rather than to individual syndicates. Individual syndicate financial strength varies, and Lloyd's has internal mechanisms (the Central Fund and annual member capital requirements) that support the market's collective rating. For placement purposes, the Lloyd's market A rating applies to all syndicates participating on a risk through the standard Lloyd's slip structure. If a placement uses Lloyd's syndicates outside the standard slip structure, verify the specific syndicate participation and confirm the slip is properly processed through Lloyd's standard mechanisms. Domestic nonadmitted carriers receive individual FSRs based on their own financial condition, with no market-level backstop equivalent to the Lloyd's Central Fund.

What triggers an AM Best rating downgrade for nonadmitted carriers?

AM Best downgrades occur when a carrier's performance on one or more of the five building blocks deteriorates materially below the threshold for the current rating level. The most common triggers for nonadmitted carriers are: reserve inadequacy (loss reserves prove materially understated, reducing effective surplus); operating performance deterioration (combined ratios trending above 110% for two or more consecutive years); catastrophic loss events that impair surplus below rating thresholds; reinsurance collectability problems that reduce effective net capital; and weakening balance sheet strength resulting from adverse investment losses. AM Best 2025 data shows reserve inadequacy was the primary rationale in 38% of nonadmitted carrier downgrades, followed by operating performance deterioration at 29% and catastrophic loss impacts at 22%.

How should an agency respond when a carrier it uses is placed on AM Best negative outlook?

A negative outlook means AM Best 2024 Rating Transition Study data shows a 68% probability of actual downgrade within 18 months. The appropriate immediate response is: stop writing new business with that carrier until the outlook resolves, brief the compliance officer, review all in-force policies placed with that carrier, develop alternative market options for upcoming renewals, and document the date you learned of the outlook change and the actions you took. Do not wait for the actual downgrade before transitioning business. By the time the downgrade occurs, you may have additional bindings with the carrier that require separate transition actions. Proactive transition on negative outlook protects both the insured and the agency's E&O exposure.

Can agencies place with nonadmitted carriers that AM Best has not rated?

Placement with unrated nonadmitted carriers is not prohibited in all states, but it creates significant exposure. Without an AM Best FSR, the broker must conduct fully independent financial analysis using the carrier's statutory annual statements, NAIC IRIS results, state examination reports, and other available financial data. That analysis must reach and document a conclusion about the carrier's financial adequacy equivalent to what AM Best's rating framework would produce. Most agency E&O policies either exclude coverage for placements with unrated carriers or impose specific conditions. Before any placement with an unrated carrier, confirm your E&O underwriter's position in writing, understand exactly what documentation they require, and determine whether the carrier has any other recognized rating (such as a Demotech FSR or an S&P Insurer Financial Strength rating) that partially substitutes for the AM Best FSR.

Written by Javier Sanz, Founder of BrokerageAudit. Last updated April 2026.

Compare nonadmitted carriers by AM Best FSR, combined ratio, and surplus to identify your strongest available markets. Compare Carriers by AM Best Rating