Evaluating Nonadmitted Carrier Financial Strength: A Practical Guide for Agencies

Evaluating nonadmitted carrier financial strength is a core broker obligation in 48 states and the primary tool for managing E&O risk on surplus lines placements. A non-admitted carrier's financial condition determines whether it can pay claims three, five, or ten years from now on a long-tail liability policy. In 2025, AM Best downgraded 23 non-admitted carriers and placed 8 additional carriers under review with negative implications, according to AM Best 2025 rating action data. Agencies that identify these warning signs early protect their clients from guaranty-fund-free insolvency and protect their own balance sheets from E&O exposure. This guide walks through six steps to evaluate nonadmitted carrier financial strength using publicly available data.

Key Takeaways

• AM Best 2025 data confirms 92% of U.S. surplus lines premium is placed with carriers rated A- (Excellent) or better, establishing that rating as the accepted floor for placement consideration
• Demotech's Financial Stability Ratings apply to homeowners market carriers, with an FSR of A (Exceptional) or better required by Fannie Mae and Freddie Mac for carrier eligibility on conforming mortgage collateral
• Six statutory ratios form the quantitative core of financial strength analysis: combined ratio, surplus-to-premium, reserve-to-surplus, liquidity ratio, investment yield, and premium growth rate
• NAIC IRIS results provide 13 automated ratio tests; carriers with 4 or more flags out of 13 trigger regulatory scrutiny and should trigger agency escalation as well
• Nonadmitted carriers with combined ratios above 110% for two or more consecutive years face a 3x higher probability of AM Best downgrade within 18 months, per AM Best 2024 Rating Transition Study data
• Annual financial strength reviews take 30 to 45 minutes per carrier using AM Best and NAIC data sources; that time investment is substantially less than the average $385,000 E&O claim arising from a non-admitted carrier insolvency

Step 1: Confirm the AM Best Financial Strength Rating

AM Best is the primary rating agency for the global insurance industry. Their Financial Strength Rating (FSR) reflects a holistic assessment of the carrier's ability to pay policyholder obligations. The FSR scale runs from A++ (Superior) at the top to F (In Liquidation) at the bottom.

For surplus lines placements, the widely accepted minimum is A- (Excellent). The table below translates each rating category into a practical placement recommendation.

How to access the rating. The current FSR for any rated carrier is free at ambest.com. Full analytical reports, including the five-year financial history, rating rationale, and outlook commentary, require a paid subscription. Most agencies find the free rating and outlook designation sufficient for placement decisions; the full report is worthwhile for any carrier representing a significant share of agency premium volume.

What the rating outlook means. AM Best assigns a forward-looking outlook to every FSR. A stable outlook means the rating is expected to hold over the next 12 to 24 months. A negative outlook signals that a downgrade is likely within 18 months. AM Best 2024 Rating Transition Study data shows that 68% of carriers placed on negative outlook experience an actual downgrade within 18 months. Do not treat a negative outlook as benign. Treat it as an early downgrade.

Step 2: Identify the Correct Rating Entity

Non-admitted carrier structures are frequently more complex than admitted carrier structures. A carrier group may include multiple legal entities with different ratings. Placing with the wrong entity creates both a coverage gap and a regulatory compliance failure.

Before pulling the AM Best rating, confirm the exact legal name and NAIC company code of the entity issuing the policy. Do not rely on brand names. Scottsdale Insurance Company and Scottsdale Indemnity Company are different legal entities with separate AM Best ratings, even though both operate under the Nationwide umbrella.

For Lloyd's placements, the rating applies to the Lloyd's market as a whole (rated A by AM Best as of 2025), not to individual syndicates. Individual syndicate financial strength varies. Review the specific syndicate's participation on the risk before placing.

The NAIC company code is the most reliable identifier. Pull it from the policy form, confirm it against the NAIC's company database, and use that confirmed entity name when pulling AM Best data.

Step 3: Pull Statutory Financial Statements

Insurance carriers file statutory financial statements with their domiciliary state using NAIC-prescribed Statutory Accounting Principles (SAP). SAP is more conservative than GAAP because it prioritizes policyholder protection over investor reporting. When evaluating carrier solvency, always use SAP statements, not any GAAP or public company filings the carrier or its parent may publish.

Key documents to obtain:

The Annual Statement (filed by March 1 for the prior calendar year) is the primary document. It includes the balance sheet, income statement, Schedule F (reinsurance detail), Schedule P (loss reserve development), and a five-year historical exhibit. Quarterly Statements (filed within 45 days of each quarter end) provide more current data between annual filings.

Where to find them. The domiciliary state DOI makes annual statements available as public records. Search the DOI website by carrier name and NAIC code. The NAIC's iSite database provides electronic access to all filings for all jurisdictions, but requires a subscription. Some carriers post condensed financial summaries on their websites; use these only to flag items for deeper investigation, not as a substitute for the statutory filing itself.

What to extract. From the balance sheet: total admitted assets, total liabilities, and policyholder surplus. From the income statement: net written premium (NWP), net earned premium (NEP), net losses incurred, loss adjustment expenses (LAE), and underwriting expenses. From Schedule P: prior year reserve development (favorable or adverse). From Schedule F: reinsurer identities and amounts recoverable.

Step 4: Calculate the Six Core Financial Ratios

These six ratios translate the raw statutory data into actionable signals. Calculate each one and compare to the benchmarks below.

Combined Ratio

Formula: (Net Losses Incurred + LAE + Underwriting Expenses) / Net Earned Premium

This is the single most important profitability metric for insurance carriers. A combined ratio below 100% means the carrier earns money from underwriting operations alone, before investment income. A ratio of 100% to 110% means the carrier depends on investment income to cover underwriting losses, which is acceptable but requires monitoring. A ratio above 110% means the carrier is destroying surplus through operations.

The NAIC 2025 Property/Casualty Industry Aggregate shows the surplus lines market combined ratio averaged 94.7% in 2025. A carrier consistently running 10 or more points above the market average deserves close scrutiny.

Surplus-to-Premium Ratio

Formula: Policyholder Surplus / Net Written Premium

This ratio measures how much capital cushion the carrier holds relative to its premium obligations. The NAIC considers 1.0:1 the minimum safe level. Top-rated surplus lines carriers maintain 1.5:1 or better. A ratio below 0.7:1 means the carrier is writing substantially more premium than its capital base can support, which creates solvency risk during adverse loss events.

Reserve-to-Surplus Ratio

Formula: Net Loss Reserves / Policyholder Surplus

This ratio shows how exposed the surplus is to reserve inadequacy. Loss reserves are estimates. If the estimates are wrong, the error comes directly out of surplus. A reserve-to-surplus ratio of 2:1 means a 10% reserve error wipes out 20% of surplus. A ratio of 3:1 means a 10% error wipes out 30%. The higher the ratio, the more vulnerable the carrier is to adverse reserve development.

Healthy carriers for long-tail lines run reserve-to-surplus ratios below 2:1. A ratio above 3:1 requires investigation into reserve methodology and historical development patterns from Schedule P.

Liquidity Ratio

Formula: (Cash + Short-term Investments) / Net Liabilities

This ratio tests whether the carrier can meet near-term obligations without liquidating long-term investment positions at a loss. A ratio above 1.0 is acceptable. A ratio below 0.8 raises concern about claim-paying ability during a stress event, particularly for carriers with concentrated catastrophe exposure that might face sudden surge in claim payments.

Investment Yield

Formula: Net Investment Income / Average Admitted Assets

Insurance carriers invest their premium float. For a typical fixed-income-dominated portfolio, yields between 3% and 5% are normal in the current rate environment. Yields above 6% suggest the carrier is reaching for return through credit risk or duration risk, both of which can impair assets during market stress. Yields below 2% may indicate impaired assets or an unusually conservative portfolio.

Premium Growth Rate

Formula: (Current Year NWP - Prior Year NWP) / Prior Year NWP

Steady premium growth of 5% to 15% annually is consistent with a carrier maintaining pricing discipline while growing its book. Growth above 25% in a single year often indicates the carrier is underpricing to gain market share. NAIC 2024 Financial Analysis Working Group data shows that carriers growing above 25% annually experience reserve inadequacy within three years in 40% of cases. Negative growth above 10% may indicate the carrier is losing competitive position or intentionally shrinking, which can create fixed-cost inefficiencies.

Step 5: Review NAIC IRIS Ratio Results

The NAIC's Insurance Regulatory Information System (IRIS) runs 13 automated ratio tests on every carrier's annual statement and flags results outside of normal ranges. State insurance regulators use IRIS results to prioritize carriers for examination. Agencies can use IRIS as an independent check on their own ratio calculations.

The 13 IRIS tests cover premium-to-surplus use, change in writings, surplus growth, two-year overall operating ratio, investment yield, gross change in policyholders surplus, change in adjusted surplus, liabilities-to-liquid assets, agents balances to surplus, one-year reserve development to surplus, two-year reserve development to surplus, and estimated current reserve deficiency to surplus.

How to interpret the results. Zero to three flags outside normal ranges is typical for healthy carriers. Four to seven flags warrant investigation of which specific ratios triggered. Eight or more flags is a serious signal that regulatory scrutiny is likely and independent analysis is mandatory before any placement.

Where to access IRIS data. State DOIs receive IRIS results directly. Agencies can request IRIS data through state DOI public records processes. Some states publish aggregated IRIS data online. The NAIC iSite database includes IRIS results for subscribers.

Step 6: Evaluate Reinsurance Program Quality

A non-admitted carrier's reinsurance program determines whether it survives a catastrophic loss event. Without adequate reinsurance, a single major hurricane or wildfire season can impair or eliminate a carrier's surplus. Review the reinsurance program through Schedule F of the annual statement.

What Schedule F discloses. Every reinsurance treaty and facultative placement, the reinsurer's legal name and NAIC code or Lloyd's syndicate number, the amount of premium ceded, and the amount of losses recoverable from reinsurers. Notes to the financial statements disclose any disputes or litigation with reinsurers.

Red flags in reinsurance. Reinsurance recoverables exceeding 50% of policyholder surplus indicates heavy dependence on third parties for solvency. Any reinsurer rated below A- by AM Best is a concentration risk. Reinsurance disputes or litigation disclosed in MD&A or financial statement footnotes create collection uncertainty that directly impairs effective surplus. Net per-occurrence retention exceeding 20% of surplus means a single large event could materially impair the carrier's capital.

The problem of reinsurance recoverables. Gross surplus looks more comfortable than net surplus when reinsurance recoverables are large. A carrier showing $200 million in surplus on a gross basis, but carrying $120 million in reinsurance recoverables from a single reinsurer rated B+, has effective net surplus closer to $80 million if that reinsurer disputes coverage. Always calculate net surplus by subtracting reinsurance recoverables when assessing true capital adequacy.

Applying Demotech Ratings for Homeowners Market Carriers

AM Best is the dominant rating agency for most surplus lines carriers, but in the homeowners insurance market, particularly in catastrophe-exposed states like Florida, Louisiana, and Texas, Demotech Financial Stability Ratings (FSRs) are equally important.

Demotech rates smaller and mid-size homeowners carriers that AM Best does not rate. Demotech's FSR scale runs from A" (Unsurpassed) at the top through A' (Unsurpassed), A (Exceptional), M (Moderate), and below. Fannie Mae and Freddie Mac require carriers to hold a Demotech FSR of A (Exceptional) or better for their policies to be used as collateral on conforming mortgages. This requirement effectively sets the floor for homeowners carriers serving the conforming mortgage market.

When evaluating a non-admitted homeowners carrier in a coastal or wildfire-exposed state, check both AM Best and Demotech. A carrier with an AM Best rating but no Demotech rating may not satisfy mortgage lender requirements for certain policyholders. A carrier with a Demotech A rating but no AM Best rating requires independent ratio analysis using the steps above.

Red Flags That Override Acceptable Ratings

Several red flags in the qualitative assessment should cause an agency to decline placement even when the quantitative metrics appear acceptable.

Reinsurance program gaps. A carrier writing coastal property with inadequate catastrophe reinsurance carries uncaptured net exposure that does not appear in the combined ratio until a major event strikes. Review the carrier's catastrophe reinsurance attachment points relative to its modeled probable maximum loss (PML).

Rapid expansion into new lines. A carrier expanding from its established specialty into unfamiliar lines often lacks the underwriting expertise and loss data to price those lines correctly. Reserve inadequacy typically follows within two to four years. Watch for carriers entering new geographic markets or coverages outside their historical concentration.

Concentrated geographic exposure without adequate cat coverage. A carrier with 80% of its property premium in Florida or California, combined with reinsurance that only covers 80% of a 1-in-100 year loss, faces a realistic scenario where a single major event impairs its surplus by 20% or more.

Investment portfolio deterioration. Carriers that moved into higher-yield but lower-quality fixed income during low-rate environments may face unrealized losses as rates rise. Check the carrying value versus market value of the investment portfolio in the balance sheet notes. Significant unrealized losses indicate the carrier's stated surplus overstates its economic surplus.

Integrating Financial Strength Review Into Placement Workflow

The financial strength review works best when it is a defined step in the placement workflow, not an ad hoc activity triggered by concern.

Pre-placement trigger. Before requesting a quote from any non-admitted carrier, confirm the carrier is on the agency's approved carrier list. The approved list should be current within 90 days. If it is not, update the financial strength review before proceeding.

Quote comparison stage. When comparing quotes from multiple non-admitted carriers, include each carrier's AM Best rating and most recent combined ratio alongside the premium figure. Producers who see this information alongside pricing develop intuition for the relationship between premium and carrier quality.

Binding confirmation. Before binding, confirm: the carrier remains on the approved list, no AM Best rating action has occurred since the last review, and the carrier appears on the current state surplus lines approved insurer list for the placement state.

File documentation. Create a one-page financial strength summary for each carrier placement. Include the AM Best rating and date, the six ratio results with data source, any IRIS flags, and the compliance officer's approval signature. Attach this summary to the policy file.

FAQ

What is evaluating nonadmitted carrier financial strength and when is it required?

Evaluating nonadmitted carrier financial strength is the process of analyzing a surplus lines carrier's AM Best rating, statutory financial ratios, reserve adequacy, and reinsurance program before placing business with that carrier. It is required by regulation in 48 states in some form. The specific requirements vary by state: most require verification that the carrier appears on an approved insurer list, and many require documented financial strength analysis as part of the broker's duty of care. Courts in California, Florida, and Texas have held that brokers must evaluate carrier financial stability as a baseline professional obligation, with the duty being highest for non-admitted placements where guaranty fund protection is absent.

What is the difference between AM Best and Demotech ratings?

AM Best rates the full range of insurance carriers globally, applying a holistic assessment across balance sheet strength, operating performance, business profile, enterprise risk management, and financial flexibility. Demotech focuses specifically on smaller regional and specialty carriers, particularly in the homeowners market in catastrophe-exposed states. Demotech uses a different analytical methodology centered on a carrier's ability to pay claims from its own resources. AM Best's A- FSR is the surplus lines industry standard minimum. Demotech's A FSR meets the Fannie Mae and Freddie Mac standard for homeowners carrier eligibility. Both ratings matter when placing homeowners coverage in high-catastrophe-risk states.

Which financial ratios matter most when evaluating a nonadmitted carrier?

The combined ratio and the surplus-to-premium ratio together provide the most useful quick read on carrier financial health. The combined ratio reveals underwriting profitability: below 100% means the carrier makes money on operations, above 110% means it is destroying capital. The surplus-to-premium ratio reveals capital adequacy: below 1:1 means the carrier is undercapitalized for its premium volume. For casualty carriers with significant loss reserves, the reserve-to-surplus ratio and the Schedule P adverse development data add critical context about reserve adequacy. All six ratios together provide a complete picture, but if time forces prioritization, start with combined ratio, surplus-to-premium, and prior year reserve development.

How often should agencies update financial strength reviews for nonadmitted carriers?

Annual reviews are the minimum standard. Agencies should also conduct immediate re-reviews triggered by four events: any AM Best rating action or outlook change, any significant catastrophic event in the carrier's geographic concentration, any senior management change, and any disclosed premium growth exceeding 20% in a reported period. Set up AM Best email alerts for every carrier on your approved panel to receive notification of rating actions within 24 hours. For carriers in high-risk segments, particularly property carriers in catastrophe-exposed geographies, quarterly reviews of publicly available data are a stronger practice than annual reviews alone.

What does an AM Best negative outlook mean for placement decisions?

An AM Best negative outlook is a forward-looking signal that 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. Agencies should treat a negative outlook as a pre-downgrade condition. At minimum, stop writing new business with that carrier and present alternative markets to clients at their next renewal. For large accounts, consider midterm alternatives if the carrier's financial trajectory is deteriorating. Document the date you learned of the negative outlook and the actions you took, as this documentation is your E&O defense if the carrier is later downgraded or becomes insolvent.

Can a carrier with no AM Best rating be used for nonadmitted placements?

Technically, unrated carriers are not prohibited in all states. However, placing with an unrated carrier creates significant E&O and regulatory exposure. Without an AM Best rating, the broker must conduct fully independent financial analysis using the carrier's statutory annual statements, NAIC IRIS results, and domiciliary state examination reports. That analysis must be documented to a standard sufficient to demonstrate professional care. Most agency E&O policies either exclude coverage for placements with unrated carriers or impose specific conditions and sublimits. Before placing with any unrated carrier, confirm your E&O underwriter's position in writing and understand exactly what documentation they require for coverage to apply.

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

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