Chapter 8

Choosing Companies Wisely

Agents are sold every day in much the same manner as they attempt to sell others. Where agents market products, so do insurance companies. In order for insurance companies to be successful they must market their products they must recruit a sales staff. To do this, they sell their products to the agents who then market them to consumers. Career agents understand the importance of choosing companies wisely. If their clients become unhappy with slow claim payment, unresponsive office staff, or steeply rising prices, agents will lose them to the next agent that enters their home.

Carrier Ratings

A. M. Best Company

Perhaps the best-known rating company is A. M. Best Company of Oldewick, New Jersey, which publishes Bests Insurance Reports. This is the oldest insurance industry rating service. Alfred M. Best began the company in 1899. It was known as an independent watchdog for the insurance industry. The agent or consumer can obtain statistical data and comments about the background and operational methods of American and Canadian insurance companies.

A. M. Best provides information regarding an insurance company's financial condition, a brief history of the company in question, information on its management, operating comments and states in which it is allowed to write and sell business. A.M. Best also grants its own ratings to companies, designed to reflect strength and weaknesses in four areas:

1. underwriting,

2. expense control,

3. reserve adequacy, and

4. investments.

Companies not receiving one of these classifications are rated as Not Assigned. This could mean there was not enough data available to assign a classification or it could mean the company was below minimum standards and could not achieve any rating at all, not even the lowest category of C.

Anybody shopping for an insurance company wants to choose one that will be around for as long as their money is invested in that company's product. Companies have been developed which rate insurance companies on numerous facets. What they look for will appear similar to the car ratings in Consumer Reports magazine since they look at dependability, durability, and safety among other things.

You may not find a rating on an insurance company in question for two reasons; they did not want to pay the $500 fee, or requested the rating not be published. In this instance, the company is listed, but without the rating that was given.

In most cases, a policyholder would be wise to place their trust in a company rated A or A+ by A.M. Best. An agent would want to look at the rating system in order to provide a sound company for the policyholder's investment. Most people probably would not do their own research on a company, even for their financial stability. As with all insurance products, whether annuities or life insurance, due diligence is essential when recommending a product to a client. Agents should read the annuity or life insurance contracts in their entirety. The history of a company's investment portfolio should be considered before recommending a company. A.M. Best provides one source that this can be done through. Some critics, though, question the integrity and meaningfulness of the A.M. Best ratings, claiming that the information upon which the ratings are based in old information and that insurance companies can pressure them for a better rating. A.M. Best, of course, defends its integrity and objectivity.

As annuities become more competitive, insurance companies may be tempted to overextend themselves. Due Diligence requires an agent evaluate the carriers that they represent. An agent should know where their carriers are investing their money. An agent should know for how long the money is invested. Most importantly, an agent should know the ratio of assets to liabilities in the companies they represent. Remember that the size of the assets alone means very little. If liabilities outmatch assets, trouble could possibly develop.

A.M. Best is only one source where company information can be found. There are other sources that can be utilized regarding the ability of an insurance company to make good on their promises. A.M. Best Company can be contacted directly at: Ambest Road

Oldewick, NJ 08858

(800) 424-BEST (there is a fee for receiving this service)

The following is a list of the A.M. Best ratings and what they mean, how they can be modified and how the "not assigned" ratings can be interpreted. For an agent, use only the most current book. Summaries are available from A.M. Best and even insurance companies themselves.

A+ (Superior)

Assigned to the companies which A.M. Best thinks has achieved superior overall performance when compared to the norms of the life/health insurance industry. Relatively, the A+ rated insurance companies generally have demonstrated the strongest ability to meet their respective policyholder and other contractual obligations.

A (Excellent)

Assigned to the companies which A.M. Best thinks has achieved excellent overall performance when compared to the norms of the life/health insurance industry. Relatively, A rated insurance companies generally demonstrate a strong ability to meet their respective policyholder and other contractual obligations.

B+ (Very Good)

Assigned to the companies which the A.M. Best thinks has achieved a very good overall performance when compared to the norms of the life/health insurance industry. Relatively, B+ rated insurance companies generally demonstrate a very good ability to meet their policyholders and other contractual obligations.

B (Good)

Assigned to the companies which the A.M. Best thinks has achieved good overall performance when compared to the norms of the life/health insurance industry. Relatively, B rated insurance companies generally demonstrates a good ability to meet their policyholder and other contractual obligations.

C+ (fairly Good)

Assigned to the companies which the A.M. Best thinks has achieved fairly good overall performance when compared to the norms of the life/health insurance industry. Relatively, C+ rated insurance companies generally demonstrate a fairly good ability to meet their policyholder and other contractual obligations.

C (Fair)

Assigned to the companies which the A.M. Best thinks has achieved fair overall performance when compared to the norms of the life/health insurance industry. Relatively, C rated insurance companies demonstrate a fair ability to meet their policyholder and other contractual obligations.

A. M. Best's Rating Modifiers:

The following rating modifiers can be attached to an A.M. Best's rating classification of A+ through C. The modifiers are used to qualify the status of the assigned rating. The modifier will appear as a lower case suffix to the rating.

c - Contingent Rating

This means that it is temporarily assigned to an insurance company when there has been a decline in performance in its profitability, leverage and/or liquidity results, but the decline has not been significant enough to warrant an actual reduction in the company's previously assigned Rating. A.M. Best's evaluation may be based on the availability of more current information and/or contingent on the successful execution by management of a program of corrective action.

e - Parent Rating

This means that a company which meets A.M. Best's minimum size requirement and is a wholly owned subsidiary of a rated life/health insurance company, insurer. However, it has not accumulated at least five consecutive years of operating experience for rating purposes. The parent company's rating is reference for companies which meet this criteria until such time as the subsidiary is assigned an A. M. Best's Rating.

p - Pooled Rating

This is assigned to companies under common management or ownership which pool 100 percent of their net business. All premiums, expenses and losses are prorated in accordance with specified percentages that reasonably relate to the distribution of policyholders' surplus of each member of the group. All members participating in the pooling arrangement will be assigned the same rating and financial size category, based on the consolidated performance of the group.

r - Reinsured Rating

This indicates that the rating and financial size category assigned to the company is that of an affiliated carrier which reinsures 100 percent of the company's business.

Ratings Not Assigned Classification

Companies not receiving an A.M. Best's Rating (A+ to C) are assigned to a rating of "not assigned" classification, which is abbreviated NA. This is divided into ten classifications to identify the reasons why the company was not eligible or assigned an A.M. Best's Rating. The primary reason is identified by the appropriate numeric suffix.

NA-1 Inactive

This is assigned to a company which has no net insurance business in force or is virtually dormant and is not 100 percent reinsured by another company. Normally, A.M. Best will continue to report on an inactive company if it is associated with a group or is an unaffiliated stock company pending sale to a new owner.

NA-2 Less than Minimum Size

This is assigned to a company whose annual net premiums written do not meet A.M. Best's minimum size requirement of $1,000,000. The exceptions are:

(a) The company is 100 percent reinsured by a rated company, or

(b) The company is a member of a group participating in a business pooling arrangement, or

(c) The company was formerly assigned a rating and is expected to meet the minimum size requirement within a reasonable period of time.

NA-3 Insufficient Experience

This is assigned to a company which meets A.M. Best's minimum size requirement, but has not accumulated at least five consecutive years of representative operating experience. For most companies, the year that A.M. Best anticipates assigning a rating is referred to in the report on the company as set forth in A.M. Best's Insurance Reports, Life/Health Edition. For all life/health companies in this category which are wholly owned subsidiaries of a rated life/health insurance company, the rating of the parent company will also be shown for reference purposes in A.M. Best's Insurance Reports, Life/Health Edition, until such time as the subsidiary is assigned a rating.

NA-4 Rating Procedure Inapplicable

This is assigned to a company when the nature of its business and/or operations are such that A.M. Best's normal rating procedure for life/health insurance companies do not properly apply. Those companies writing lines of business uncommon to the life/health field; or companies not soliciting business in the United States; or companies which are not actively soliciting new business and are in a run-off position; or companies whose sole insurance operation is the acceptance of business written directly by a parent, subsidiary or affiliated insurance company or those writing predominantly property/casualty insurance under a dual charter would be assigned to this classification.

NA-5 Significant Change

This is assigned to a previously rated company whose representative operating experience has been, or is expected to be, significantly interrupted or changed. This may be the result of change in ownership and/or management whereby the existing book of business is sold or reinsured; or a significant revision in the portfolio of coverage offered; or any other relevant event(s) which has or may affect the general trend of a company's operations. Depending on the nature of the change, A.M. Best's rating procedure may require the company is eligible for a rating.

NA-6 Reinsured by Unrated Reinsurer

This is assigned to a company which has reinsured a substantial portion of its book of business or maintains considerable amounts of reinsurance recoverable in relation to the policyholder's surplus with reinsures which have not been assigned a A.M. Best Rating.

NA-7 Below Minimum Standards

This is assigned to a company that meets minimum size and experience requirements, but does not meet the minimum standards for A.M. Best's Rating of "C."

NA-8 Incomplete Financial Information

This is assigned to a company which fails to submit, prior to the rating deadline, complete financial information for any year in the current five year period of review. This requirement also includes all domestic life/health subsidiaries in which the company's ownership exceeds 50 percent.

NA-9 Company Request

This is assigned when a company is eligible for a rating but disputes the A.M. Best's Rating assignment or procedure. If a company subsequently requests a rating assignment, A.M. Best's policy normally requires a minimum period of three years to elapse before the company is eligible for a rating.

NA-10 Under State Supervision

This is assigned when a company is under conservator ship, rehabilitation, receivership or any other form of supervision, control or restraint by state regulatory authorities.

Standard & Poors Corporation Rating System

Standard & Poor's rating system is along the same lines as A.M. Best's. Standard & Poor's insurance claims-paying ability rating is an opinion of an operating insurance company's financial capacity to meet the obligations of its insurance policies in accordance with their terms. The claims-paying ability ratings are based on current information furnished by the insurance company or obtained by Standard and Poor's from other sources it considers reliable. They do not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings listed below may be modified by adding a plus or minus sign to show relative standings within the major rating categories.

These reports are generally not available to the public unless the insurance company which purchases the report chooses to make it available to the policyholders. Standard & Poor's Corporation is at:

25 Broadway

New York, NY 10004

(212) 208-8000

AAA

Extremely strong capacity to meet contractual policy obligations.

A very strong capacity to meet contractual policy obligations.

Strong capacity to meet contractual policy obligations.

BBB

Adequate capacity to meet contractual policy obligations.

BB, B, or CCC

Uncertain or weak capacity to meet contractual policy obligations, with CCC assigned to those with the weakest or most uncertain capacity.

Default. Terms of the obligation will not be met.

THE FOLLOWING COMMENTS ARE EXCERPTED FROM STANDARD & POOR'S INSURANCE RATINGS "FOCUS", DECEMBER 1995, VOL. 4, NO. 4

Some people believe that insurer ratings are precise "scientific" measures of the financial strength of insurers. Ratings, they think, are like a blood pressure test or taking one's temperature. Such tests produce exact results and therefore by that analogy, ratings ought to communicate equally exact information. Of course, this is not always the case, but by looking at the ratings from several companies, a fair opinion can be reached.

Standard & Poor's ratings are opinions about the financial health of insurers based on the analysis conducted by our professional insurance analysts. These analysts, based in New York, Toronto, London, Tokyo, Melbourne, and Paris have spent many years evaluating the financial strength of insurance companies in more than 70 countries throughout the world. Although many of the tools that financial analysts use to evaluate insurers are very precise just like the medical tests used by a doctor, the conclusions that analysts reach from studying these results are a matter of judgment. Ratings are therefore our judgment of the financial stability of many thousands of insurance companies.

The insurers we rate in the "secure" range have, in our opinion, the financial strength to honor their policyholder obligations. In other words, at a BBB ("adequate financial security) rating, the insurer has met all of our standards of a secure company.

Although some respected observers recommend that insurance be purchased from an insurer that has the top two ratings of two recognized rating agencies, not everyone agrees with this very conservative advice. Certainly, this is not Standard & Poor's viewpoint. In fact what we are saying is that insurers rated BBB or higher are, in our judgment, secure and likely to remain so.

The growing reliance on these ratings is a healthy, positive development. Making better informed decisions about financial strength of insurers is good for consumers, good for brokers, and ultimately good for the industry itself.

Moodys Rating System

Moody's concentrates a little more on the quality of the company's investment portfolio. The Moody's Investor Service ratings may be divided into three sub-categories.

Moody's Investors Service entered the bond-rating business in 1904. They have been evaluating life insurance companies since the 1970s. In 1986 Moody's introduced insurance financial strength ratings to provide guaranteed investment contract (GIC) investors with objective, independent credit opinions. In April 1991, the firm revised several elements of its benchmark capital ratio to reflect the changing nature of risk in the life insurance industry and to improve the accuracy of the ratio. Moody's offers financial strength ratings on nearly 80 life insurance companies, and the list continues to grow. The rated companies represent more than 60 percent of the life insurance industry's assets and more than 90 percent of total GIC assets.

Insurance companies pay approximately $25,000 for the rating services. Moody's sees its real clients as financial intermediaries such as brokers, pension plan sponsors, structured settlement advisors and agents. Much of their attention has been given to companies involved in group pensions and individual annuity business. In recent times, coverage has expanded from initial focus on companies selling GICs to annuity providers, universal life writers, and providers of other life products.

Like Standard & Poor's rating service, Moody's ratings are not generally available to the public unless the insurance company chooses to make them available to the policyholder. For an annual fee of $125, Moody's quarterly Life Insurance Handbook gives ratings, explains rationale, and provides executive summaries for all life insurance companies. The company can be contacted at:

99 Church Street

New York, NY 10007

Aaa

Insurance companies which are rated Aaa are judged to be of the best quality. Their policy obligations carry the smallest degree of credit risk. While financial strength of these companies is likely to change, such changes as can be visualized are most likely to impair their fundamentally strong position.

Insurance companies which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what is generally known as high-grade companies. They are rated lower than the best companies because long-term risks appear somewhat larger.

Insurance companies which are rated A possess many favorable attributes and should be considered upper-medium grade. Factors giving security to punctual payment of policyholder obligations are considered adequate but elements may be present which suggest a susceptibility to impairment some time in the future.

Baa

Insurance companies which are rated Baa are considered as medium-grade, i.e., their policyholder obligations are neither highly protected nor poorly secured. Factors giving security to punctual payments to the policyholder obligations are considered adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. These companies' policy obligations lack outstanding investment characteristics and in fact have speculative elements as well.

Insurance companies which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the ability of these companies to discharge policyholder obligations may be very moderate and thereby not well safeguarded during other good and bad times in the future. Uncertainty of position characterizes policyholder obligations of insurance companies in this class.

Policyholder obligations of insurance companies which are rated B generally lack characteristics of the desirable insurance policy. Assurance of punctual payment of policyholder obligations over any long period of time is small.

Caa

Insurance companies which are rated Caa are of poor standing. They may be in default on their policyholder obligations or there may be present elements of danger with respect to punctual payments of policyholder obligations and claims.

Insurance companies which are rated Ca are speculative in a high degree. Such companies are often in default on their policyholder obligations or have other marketed shortcomings.

Insurance companies which are rated C are the lowest rated class of insurance companies and can be regarded as having extremely poor prospects of ever attaining real investment standing.

The Fitch Ratings

Fitch Ratings was founded as the Fitch Publishing Company on December 4^th, 1913 by John Knowles Fitch. Established in New York City, the company began as a publisher of financial statistics whose consumers included the New York Stock Exchange. Fitch became the recognized leader in providing critical financial statistics to the investment community through such publications as the Fitch Bond Book and the Fitch Stock and Bond Manual.

In 1924 Fitch introduced the familiar AAA to D ratings that we often use today to rate insurance companies. In 1975 Fitch was one of three statistical organization companies recognized by the Securities and Exchanges Commission.

Since 1989, when Fitch was recapitalized by a new management team, Fitch has seen lots of growth. In 2000 Fitch acquired Duff & Phelps Credit Rating Company, headquartered in Chicago. Later that same year they bought the rating business of Thomson BankWatch. These two purchases added a significant number of international offices and affiliates.

Duff & Phelps Credit Rating Company includes an insurance company management interview, quantitative analysis and a view of the company's future. The ratings are updated quarterly in a effort to make the material more timely. Duff & Phelps rated approximately thirty insurance companies during the 1989-1990 period as contracted for by the insurance companies. The Duff & Phelps ratings probably will only be obtainable from the insurance companies that have contracted for their services.

Duff & Phelps rating process was first introduced in 1986. It is divided into four parts.

1. Duff & Phelps requests the company's financial reports.

2. Representatives travel to the insurance company for an initial on-site interview after the reports have been received. During the meeting, the rater meets in groups and individually with key management personnel, including the chief executive officer, chief financial officer, chief investment officer and product managers.

3. Duff & Phelps invite a group of executives from the insurance company to their Chicago headquarters to confer with members of the rating committee. This meeting gives the insurance company the opportunity to meet its evaluators and get a better sense of the rating process.

4. The rating committee convenes to establish a rating. It presents the grade and an analysis to the insurance company. The insurance company can choose either to publish or discard the results.

As part of the contract, the insurance company agrees to provide relevant financial information quarterly, for rating updates. There is also an annual review meeting at the start of each new rating year. Duff & Phelps can be contacted at:

55 East Monroe Street

Chicago, IL 60603

AAA

Highest claims paying ability. Risk factors are negligible.

AA+, AA, or AA-

Very high claims paying ability. Protection factors are strong. Risk is modest, but may vary slightly over time due to economic and/or underwriting conditions.

A+, A, or A-

High claims paying ability. Protection factors are average and there is an expectation of variability in risk over time due to economic and/or underwriting conditions.

BBB+, BBB, or BBB-

Below average claims paying ability. Protection factors are average. However, there is considerable variability in risk over time due to economic and/or underwriting conditions.

BB+, BB, or BB-

Uncertain claims paying ability and less than investment grade quality. However, the company is deemed likely to meet these obligations when due. Protection factors will vary widely with changes in economic and/or underwriting conditions.

B+, B, or B-

Possessing risk that policyholder and contract holder obligations will not be paid when due. Protection factors will vary widely with changes in economic and underwriting conditions, or company fortunes.

CCC

There is substantial risk that policyholder and contract holder obligations will not be paid when due. Company has been or is likely to be placed under state insurance department supervision.

Weiss Research, Inc. Rating System

Weiss is based on a rating system that should "flag potential problems in such a way that the average consumer will be adequately informed in a timely fashion."

Weiss developed a proprietary computer model that uses some 200 ratios derived from 750 pieces of data to determine an insurer's rating. They do not meet with managers or other executives for the rating. Data for these calculations come from the statutory reports insurance companies submit to the insurance commissioners, plus supplemental data from the companies themselves. Weiss Research receives quarterly reports from the insurance companies. New information is added to the analytical process and is reported in quarterly updates.

The results of the analysis and the ratings are sent to the companies with a request that the data be examined and verified. Some insurance companies do not respond to these requests. Others object to the rating received. Still others object so strenuously that they threaten lawsuits. Weiss Research, Inc. can be contacted at:

PO Box 109665

Palm Beach Garden, FL 33410

(800) 289-9222

Each rating can be given a (+) or (-) sign. The plus sign is an indication that with new data, there is a modest possibility that this company could be upgraded. The A+ rating is an exception since no higher grade exists. The minus sign is an indication that, with new data, there is modest possibility that this company could be downgraded.

A (Excellent)

This company offers excellent financial security. It has maintained a conservative stance in its investment strategies, business operations and underwriting commitments. While the financial position of any company is subject to change, we believe that this company has the resources necessary to deal with severe economic conditions.

B (Good)

This company offers good financial security and has the resources to deal with a variety of adverse economic conditions. However, in the event of a severe recession or major crisis, we feel that this assessment should be reviewed to make sure that the firm is still maintaining adequate financial strength.

Important Note: Carriers with a rating of B+ of higher are included on our Recommended List.

C (Fair)

This company offers fair financial security and is currently stable. But during an economic downturn or other financial pressures, we feel it may encounter difficulties in maintaining its financial stability.

D (Weak)

This company currently demonstrates what we consider to be significant weaknesses which could negatively impact policyholders. In an unfavorable economic environment, these weaknesses could be magnified.

E (Very Weak)

This company currently demonstrates what we consider to be significant weaknesses and has also failed some of the basic tests that we use to identify fiscal stability. Therefore, even in a favorable economic environment, it is our opinion that policyholders could incur significant risks.

F (Failed)

Company is under the supervision of state insurance commissioners.

Additional Notations:

SA SB SC SD SE (Smaller Companies)

The S designates companies with less than $25 million in capital and surplus, excluding companies with more than $500 million in admitted assets regardless of the capital and surplus levels. It does not reduce or diminish the letter grades A through E. The S is simply a reminder that consumers may want to limit the size of their policy with this company so that the policy's maximum benefits per risk do not exceed one percent of the company's capital and surplus.

U (Unrated Companies)

This company is unrated for one or more of the following reasons:

(a) total assets are less that $1 million,

(b) premium income for the current year was less than $100,000, or

Standard Analytical Services

This rating service gives a descriptive report of a company relative to the so-called "25-giants" of the insurance industry. The pamphlet handed out looks very similar to the one provided by A.M. Best. It is bought mostly by companies that do not receive a favorable rating from A.M. Best. Professionals question the credibility and usefulness of this pamphlets.

What Do All These Letters and Numbers Mean?

Obviously A+ under Bests system is better than their rating of C. That much is easily understood. The Best rating system follows what people are already accustomed to: a system of letters and combinations of numbers and letters. Standard & Poors system also uses letters. Since their system is less detailed some prefer it. Whichever system is preferred, all rating companies should be used, comparing the different companies views.

Rating insurance companies is not an exact science. While those who do so are very experienced in the industry, there are still variables that make part of the process a prediction. In fact, the statement made by Standard & Poor is important to note: Although many of the tools that financial analysts use to evaluate insurers are very precise just like the medical tests used by a doctor, the conclusions that analysts reach from studying these results are a matter of judgment.

Many agents prefer to represent only companies with the highest ratings from two or more companies. While companies with lower ratings often have superb records in claim payments and other obligations, it is understandable why agents might prefer to stay only with the top companies. Agents must look at the data and reach their own conclusions just as analysts do when they look at the information.

Claims paying abilities and other obligations will certainly be linked to the companys financial strength. A company that is struggling may look for ways to maximize their funds. This might be done by delaying the payment of claims, commissions, or other obligations.

End of Chapter Eight