Let’s Talk Life Insurance Company Ratings!
With the economic meltdown and/or recession and/or whatever is going on, the question of life insurance company ratings and their financial stability has received its’ fair share of scrutiny.
In an effort to demystify some of the ratings stories and bring some reason to the table I would like to share with you some information that probably isn’t that easy for a non agent to come up with. Let’s start with a spreadsheet of eight companies I use fairly frequently showing their ratings from the different rating agencies and a compilation of relevant financial information. For those unfamiliar with some of the terminology this cheat sheet can help.
One of the myths that people are dealing with right now is that life insurance companies are getting bailouts from the government. There is TARP money available for insurance companies that own or are affiliated with banks, but the truth is that while it has been offered and a number of insurance companies have actually purchased banks so that they could qualify for it if they need it, there just hasn’t been much, if any action on that front.
Insurance companies are uniquely positioned to be able to pull through these rough times because of the large profits they’ve had in years leading up to now, an income stream that hasn’t been impacted the way, for instance, automakers or other manufacturing industries have, and their huge reserves that they have to carry by law. While plenty of insurance companies have taken a beating on Wall Street, their rough ride has, like so many companies, not been a true reflection of their profitability.
Back to ratings for a minute. In the ratings and financial report provided there were ratings from the 5 major rating agencies and a “Comdex” score. Each uses slightly different criteria to come up with their rating. Here, from their own websites are how each assesses a company.
1. AM Best
2. Weiss (The Street.com)
3. Fitch
4. Moody’s. Moody’s must think they are exceptionally fascinating. Look around page 13 or 14 for relevant rating explanations.
5. Standard and Poor’s. I found very little relevant information on S&P just as I have generally found very little emphasis put on S&P ratings.
The tool I have found the most helpful in rating’s analysis is the Comdex rating. Simply put this ranks a company on a percentage scale against all of the other rated life insurance companies (about 1100). If a company is rated in the 90th or higher percentile you know you are dealing with a company that over the spectrum of all the rating agencies ranks among the top 10%. Would I put any huge weight on a company that has a 94%. Simply put, no! The only tangible difference I have found in the actual companies is that those rated at or within a few points of 100% tend to be large whole life or universal life, cash value companies. They are there due to their huge cash reserves, or should I say your huge cash reserves, not because they are a better managed or more stable company. I guess there is one other tangible difference that is fair to note. The companies at or near 100% are the most expensive insurance providers in the country.
Bottom line. Are ratings worth looking at? Absolutely. If there was a Swamp Life of Vermont, I suspect that ratings for that company might tell a very compelling story. Should you run from a company because they don’t have the highest rating available? Absolutely not. There are a large number of old, stable, profitable life insurance companies who believe as I do that cash value policies are one of the biggest rip offs out there, so their ratings reflect, not a lack of stability, but a lack of your cash and possibly a higher level of integrity. Just like the higher rated companies they too have to carry reserves to meet their obligations.
Add comment April 17th, 2009
