Four firms currently rate insurance companies. They are A.M. Best Company, Standard and Poor’s Corporation, Moody’s Investors Service, and Fitch Ratings. Each firm employs its own rating system, and some rating agencies are considered to be more stringent than others.

Not all insurance companies are rated by each agency. Each agency employs its own techniques for determining a given insurance company’s rating. Areas of consideration may vary and these include financial leverage, management stability, recent performance, and the rated company’s overall financial situation. External factors like competition, diversification, and market presence may also be considered.

Each rating agency provides a description of its analysis and defines the meaning of each rating from the highest to the lowest. Since there are differences between rating agencies, this can make a fair comparison between different ratings somewhat confusing. Information on how to contact each rating service will be found below (including some useful links). The chart at the end of this report compares the ratings given by each agency. To obtain the latest ratings, please check with the appropriate rating service.

The following summary describes each rating service and the rating criteria used, along with a brief explanation of how insurance companies initiate the rating process. It is important to keep in mind that these criteria may change. 

Third Party Ratings and Financial Data

There are four major rating firms that analyze life insurance companies on a regular basis, and they offer their ratings and analysis online: 

A.M. Best Company — Simply enter the name of your company under the “Search Ratings” category.  In addition to providing you with an up-to-date rating, under the various folder tabs you will find the following:

1. The age of the company (a minimum of 50 years’ experience is recommended);
   
2. The corporate address;
   
3. The company ownership structure (stock or mutual);
   
4. The Financial Size Category (recommended minimum is IX);
   
5. The business overview; and
   
6. The 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 that provides financial statistics for the past five years. But unless you’re proficient at interpreting insurance company financials, this report may prove rather overwhelming. (Their web site is www.ambest.com)

Standard & Poor’s — To access the Insurer Financial Strength Ratings, click on the “Ratings Lists” link, and then choose the “Insurance” category. When you have located your company, the resulting report is quite detailed. In particular, pay attention to the following data:

1. Total assets for five years (goal is moderate growth over this period with a recommended minimum of $2 billion in assets);
   
2. Total liabilities (should experience roughly the same growth rate as total assets);
   
3. Net income (should remain relatively stable);
   
4. Business review and history; and
   
5. A pie chart indicating the company’s product sales. This last category is particularly important in times of change. If a company sells too much of any one product type (individual annuities, or permanent life insurance, for example) 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. 
   
6. Lack of product diversification was a leading factor behind the failure of Mid-Continent Life. The company primarily marketed one policy type and, when that product proved to be under-priced, the entire company was at risk. (Their web site is www.standardandpoors.com) 
   

Fitch — The Financial Strength Ratings Reports can be found under the “Insurance” category. In addition to a letter rating, the Fitch web site will provide you with a detailed business review and overall out- look for the company. In particular, you should pay attention to the following:

1. The product mix (life, annuities, group insurance);
   
2. The company’s marketing focus (upscale and advanced marketing is usually a sign that much of the company’s business is tax-oriented); The primary states where the company sells insurance (diversification between several states is advised);
   
3. The company’s reinsurance practices; and
   
4. The quality of the assets in which the company invests. High-risk investments (junk bonds and defaulted mortgages, for example) have caused the downfall of several large insurance companies, such as Executive Life, First Capital Life, and Monarch Life, and a company’s exposure to such investments should be very limited. (Their web site is www.fitchratings.com)
   

Moody’s — Insurance Financial Strength Ratings can be found under the “Insurance” category. (Their web site is www.moodys.com.)

The web site addresses given here are their main home pages, for each rating service. It can sometimes be a challenge to find the insurance rating pages on each site; however, keep looking as the information is there. At the time of the writing of this book, you will need to establish a free account for some of these services.