0 Understanding Insurance Company Financial Ratings

Understanding Insurance Company Financial Ratings
by Richard F. O’Boyle, Jr., LUTCF, MBA

Triple A, Gone Away

Well, it's official: The Government of the United States no longer has a perfect credit account. On August 5, 2011 it is reduced credit rating by Standard & Poor's AA + from AAA. The rating of the debt of the federal government and some specific agencies such as mortgage giants Fannie Mae and Freddie Mac fell due to S & P believes that it is more risky due to the growing federal debt and the inability of the political process to reform programs social help.

In the theory of the four major rating agencies - Standard & Poors, Moody, A. M. Best and Fitch - are the arbiters of the country's credit rating. Despite all the sound and fury of politicians in Washington, there are some real-life implications for people on Main Street. The S & P reduced by one notch FICO score actually brings the country to something like 775 800.

It's not as dramatic, since only one of the four major rating agencies adopted a drastic approach (the others said that the government's problems are long term and not immediately affect their grades). I would point out that some smaller agencies had already taken the politically unacceptable to downgrade the country step. We will also note that S & P has been under political pressure would be to "be realistic" about your score, and he did a pathetic job qualification of all those backed by toxic mortgages (see "The Big Short") values .

Given all the political pressure from Congress regarding the fiasco of mortgage securities over the last three years, it is ironic that they should come to downgrade the US government .. Expect to see "show trials" (ie, the Congress sessions) in Washington demonizing rating agencies. Again, it is ironic since the US It has been less than reliable in accounting for the future, such as Social Security and Medicare obligations.

But again, let's put politics aside and investigate the implications of the "real life" of the aforementioned "rebate"

Insurance Company Ratings: What do they mean?
Along with the downgrade of government credit, S & P also lowered the AAA rating of a handful of insurance companies more star. They also put the rest of the insurance industry in a "negative" outlook (lowered from "stable"), mainly due to heavy exposure to all of them have US securities in their reserve portfolios.

Companies downgraded to AA + (negative outlook) AAA (Stable Outlook):
New York Life
Northwestern Mutual
The Insurance & Annuity Association teachers (TIAA-CREF)
Knights of Columbus
Automobile Association United Services (USAA)

Companies with a AA + rating with a "stable outlook" reduced to "negative outlook"
Guardian Life Insurance Company of America
Berkshire Hathaway, Inc.
Warranty secured Corp.
Massachusetts Mutual Life Insurance Co.
Western & Southern Financial Group, Inc.

Does this mean that your life insurance company is about to go bankrupt? Probably not. What it does mean is that S & P has decided that insurance companies that invest heavily in bonds of a country can not have a higher credit rating than actual bonds they hold. Thus, the same way, if the US rating It is going down, so must businesses that have a lot of US debt .. Needless to say, the insurance companies say they are unfairly affected being affected due to political paralysis in Washington and still deserve an AAA rating.

Looking ahead, insurance companies strengthen their credit ratings generally by selling lower-quality assets and the purchase of higher quality. This can effectively improve their long-term balances and even increase their exposure to debt instruments United States. S & P affirms ratings on many AAA municipal bonds, which are still high quality assets for insurance companies to put in their reserves. The reason for the top handful of companies actually had the best ratings is that they often are better judges of the quality that even the rating agencies.

The decline in US credit rating ', In the immediate term, it has not led to a massive sale of assets US Treasury .. But in fact, we have seen a "flight to quality" as many investors see Treasuries US as the "clean shirt in a basket full of dirty shirts." (I think I can prove guru Nouriel Roubini economy for this analogy on Bloomberg Radio). Indeed, US assets in AA + are even better quality than many European bonds.

Ultimately, the jury is still out on whether interest rates on mortgages and credit cards rises upward. interest rates long term will be most affected by the strength or weakness of the global economy and the amount of stimulus provided by the Federal Reserve and Congressional Budget committees.

Why remain important Scores
So, why even they care about ratings assigned to countries and companies or individual financial products? no rating agencies have done a terrible job so far? They are the people with masks for green eyes that make numbers and giving their stamp of approval, so corrupted by the profit or fearing political reprisals they can not "do the math" objectively?

In short, there are two reasons: First, we need some financial criteria for comparing countries, companies and bonds. There is really no guarantees associated with a rating of "AAA", for example. It is only a relative measure and is only useful when compared with something with a "B +", for example. Secondly, a classification gives us the assurance that someone who is objective with some kind of sophisticated financial education has looked at all the footnotes and read all the fine print ... because Gd s knows no one else has (a sometimes even the sellers). Of course, recent events have dramatically shown that the current system has failed. Unfortunately, it is the only system we have.

So let's take a look what the qualifications of the life insurance companies really mean. Given the hundreds of life insurance companies that offer policies in the US It can be a challenge to compare their relative financial strength and claims-paying ability. The major rating agencies reviewed in detail the financial statements of listed companies as well as private insurance companies or mutual life. Based on their opinions and new research on competitive intelligence and other sources, they will give an opinion on the solvency of the life insurance company and assign letter grades for each company and its subsidiaries. Moreover, agencies tend to see what direction they think future rating will go in its "perspective" of the company or industry.

Note that while the core attributes of the rating agencies look is "financial strength" which also take into account how well the company operates as a business, the size of its market share, exposure to other companies (such as management consulting or investment goods and lower lines) and general business combination. For example, every year, S & P considered positive New York Life "outstanding sales force" as a competitive advantage.

How to Compare Life Insurance Company ratings from different agencies
I'm a big fan of the old adage, "Life is too short to drink bad wine." With hundreds of life insurance companies available out there, does it make sense to go with a medium level when they are no longer as many other top-notch? Similarly, with all five investment funds star rated by Morningstar, why invest in a fund three stars? qualification of a life insurance company is effectively a guide to its underlying financial strength and its ability to pay its claims when the time comes for you to collect the death benefit.

Note that many companies have subsidiaries that have names that sound similar (often due to state regulations or their own business strategies). When researching your particular company make sure you are looking at the real company that the contract of life insurance underwriting. For example, "MetLife" may actually "MetLife Investors" if the 30-year plan period in New York. Your agent should be able to give the exact name of the company. Your state insurance commission will have regular filings of each company that sells life insurance that state.

Each rating agency uses its own proprietary methodology and mathematical model to assess the strength of insurance companies are reviewed. They look at factors such as the quality of the assets and reserves of the insurer; its source (s) of funding; the return on the basis of a review of public financial records and documents presented; market share in different product categories; Talent management; and analysis of competitive market compared to other insurance companies.

Here’s how the various rating agency “grades” match up:

Rank	A. M. Best	Standard & Poor's	Moody's	Fitch	Numerical Grade (*)	Comdex Score (#)
1	A++ Superior	AAA Extremely Strong	Aaa Exceptional	AAA	9.0	100
2	A+ Superior	AA+ Very Strong	Aa1 Excellent	AA+	8.3
3	A Excellent	AA Very Strong	Aa2 Excellent	AA	8.0	90
4	A- Excellent	AA- Very Strong	Aa3 Excellent	AA-	7.7
5	B++ Good	A+ Strong	A1 Good	A+	7.3
6	B+ Good	A Strong	A2 Good	A	7.0	80
7	B Fair	A- Strong	A3 Good	A-	6.7
8	B- Fair	BBB+ Good	Baa1 Adequate	BBB+	6.3	70
9	C++ Marginal	BBB Good	Baa2 Adequate	BBB	6.0
10	C+ Marginal	BBB- Good	Baa3 Adequate	BBB-	5.7
11	C Weak	BB+ Marginal	Ba1 Questionable <![if !supportLineBreakNewLine]> <![endif]>	BB+	5.3
12	C- Weak	BB Marginal	Ba2 Questionable <![if !supportLineBreakNewLine]> <![endif]>	BB	5.0	40
13	D Poor	BB- Marginal	Ba3 Questionable <![if !supportLineBreakNewLine]> <![endif]>	BB-	4.7
14	E Under Regulatory Supervision	B+ Weak	B1 Poor	B+	4.3	20
15	F In Liquidation	B Weak	B2 Poor	B	4.0
16	S Suspended	B- Weak	B3 Poor	B-	3.7
17		CCC+ Very Weak	Caa1 Very Poor	CCC+	3.3
18		CCC Very Weak	Caa2 Very Poor	CCC	3.0
19		CCC- Very Weak	Caa3 Very Poor	CCC-	2.7
20		CC Extremely Weak	Ca Extremely Poor	CC	2.0
21		R Regulatory Action	C Lowest	C

(*) Numerical Grade conversions courtesy of The New York Times(#) Comdex ranks insurance companies based on what other rating agencies have given them. The companies are then graded on a percentile system with only the top five companies in the 100th percentile, and others falling into the scale below that. The placement of the numerical rankings in the chart is my approximation.

Links to Rating AgenciesAM BestFitchMoody’sStandard & Poor'sWeissComdex Score

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