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I had emailed some quotes off to a client this week with Genworth Life and Annuity, a major player in no lapse guarantee UL’s and in this case the best rate class offer I had received when shopping the case. She went on line and found out that Genworth has been downgraded recently to A by AM Best from A+, Superior to Excellent, and from AA to A with Standard and Poors, from Very strong to Strong.

I personally put most of my faith in AM Best as a rating agency for life insurance companies and won’t quote companies without an A or better rating. Having said that I will never push my opinion of ratings on anyone. In the case of the Genworth quotes I simply asked the client if they had a company they would rather I go with, or a threshold for ratings that they want me to stick. Far more important than my opinion is the customer comfort with what they are buying.

But let’s talk ratings. Everyone knows that our country was actually downgraded this year and virtually all of the European countries were just downgraded with the exception of Germany. The US was downgraded by Standard and Poors from AAA to AA+, Extremely Strong to Very Strong, at a time when our government couldn’t decide whether to stay at $13 trillion in debit or allow our country to go even further in debt.

It is hard to put in context how ratings work in a world that is financially dancing on hot coals it seems. When a country is totally upside down in debt the way the US is with literally no conceivable way of righting the ship, they get downgraded from Extremely strong to Very Strong. When a life insurance company has a bad year, but makes a profit and if they needed to could cash out and pay all of their debt, they get downgraded by the same margin. Doesn’t make sense to me, but they didn’t make me the King of the Rating Agencies.

Life insurance ratings have always favored companies that deal primarily in cash value life insurance, whole life and universal life versus term. The reason for this isn’t rocket science. Companies like New York Life, USAA and Northwestern Mutual are cash cows of the largest size. When virtually every policy you sell is supported by its’ own internal cash, which shows on the balance sheets of the company, they tend to look stronger on paper than a company that is very big in term insurance or universal life with a no lapse guarantee, policies that are guaranteed through reserves held by the company that, by law, have to meet the projected mortality risks. they have the ability to pay claims which is really what it’s all about.

But let’s look at Northwestern Mutual who have historically had the highest ratings available from all the rating agencies, giving them a Comdex score of 100%. Standard and Poors recently gave them the same downgrade that they gave the the US, from AAA to AA+. Northwestern Mutual kind of poo pahed the whole thing, basically insinuating that Standard and Poors got up on the wrong side of the bed. Are they too far in debt or in danger of defaulting on anything? No.

Then there’s New York Life. You would think that a company that has the highest ratings from every rating service known to mankind would be in a financial position to offer a better selection of products to AARP. The AARP/New York Life marriage has screwed our older adult population for years, but of course none of those ratings say anything about integrity.

Look at Prudential Life, the Rock. Prudential Financial was No. 2 in FORTUNE® magazine’s 2011 World’s Most Admired Companies ranking in the Insurance: Life and Health category. While their ratings are good, they aren’t by any means at the New York Life level. Maybe Fortune looks at integrity because Pru is one of those companies that is known for doing good things. I don’t know of any of their products that jilt old folks.

One of the things ratings don’t take into account is that even if a company slides down hill far enough that they have to be sold, some larger cash rich company will buy the business and by law, they have to keep all of the prices and guarantees intact. The only thing that changes is that you make your premium check out to another company.

Bottom line. Ratings are in my thinking over rated. To be ignored? No. But a closer look at other aspects of a company may reveal what the rating companies don’t. I don’t ignore them. As I mentioned, my benchmark for a company I will quote is AM Best A rated or better. If you have any questions or want to tell me I’m a ratings idiot, comment on this post. If you are concerned by a recent downgrade of an insurance company where you have life insurance, call or email me directly. Let’s talk.