When selecting or evaluating a life insurance company, a logical place to begin is by reviewing the ratings given by the four major financial rating agencies.
These ratings are an evaluation of an insurance company’s financial soundness and creditability, which are the opinion of any of the four rating agencies.
In some cases, the life insurance company will ask one or more rating companies for an evaluation and rating. The life insurance company will then pay a service fee to the rating agency, which typically ranges from $25,000 to $30,000 per rating.
The four major rating systems are A.M. Best Company, Standard and Poor’s Corporation, Moody’s Investors Service, and Fitch Ratings. Each company employs their own rating technique and evaluation process.
Each rating agency provides a description of its analysis while also defining the meaning of each rating, from the highest to the lowest level of importance.
Summary of Rating Services:
A.M. Best Company
On their homepage, you can simply enter the name of a company under the “Search Ratings” category and find the following information:
· Age of the company – minimum 50 years of experience is recommended
· Corporate address
· Company ownerships structure – stock or mutual funds
· Financial size category – recommended minimum is IX
· Business overview
· History of the company, including any mergers and acquisitions
In addition to this free data, A.M. Best also offers a complete company report for $19.95, which provides financial statistics for the past five years.
But unless you’re proficient at interpreting insurance company financials, this report may prove rather overwhelming
Standard & Poor’s
To access the insurer financial strength rating, click. Here you can locate your insurance company and their rating report, which is quite detailed. Pay attention to the following information:
· Total assets for five years – goal is moderate growth over this period with a recommended minimum of $2 billion in assets
-Total liabilities – should experience roughly the same growth rate as total assets
-Net income – should remain relatively stable
-Business review and history
-Pie chart indicating company’s product sales – look for product diversification
If a company sells too much of any one policy type a sudden shock to the marketplace, such as a change in the economy or tax system, could result in a sharp decline in the company’s business.
The Financial Strength Rating Reports can be found here. In addition to a letter rating, Fitch provides a detailed business review and an overall outlook for the company. Pay attention to the following information
-Product mix – life, annuities, group insurance
-Company’s marketing focus – upscale and advanced marketing is usually a sign that much of the company’s business is tax-oriented
-Primary states where the company sells insurance – look for diversification
-Company’s reinsurance practices
-Quality of the assets in which the company invests
Insurance Financial Strength Ratings can be found here. It can sometimes be a challenge to find the page on each site; however, keep looking as the information is there. In order to gain access to most of the online information, you do need to establish a free account.
By Tony Steuer, CLU, LA, CPFFE
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.