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What Is It?

It's important to buy an insurance policy from a financially strong insurance company. Although insurance companies infrequently become insolvent, it does happen, so you need to make sure that you buy a policy from a reputable company that will be around for a long time. You can get information about insurance companies from several major insurance-rating services that review, evaluate, and rank the financial strength and claims-paying ability of insurance companies. The ratings services discussed here are A. M. Best, Standard & Poor's, Fitch (formerly Duff & Phelps), Moody's, and The Street.com (formerly Weiss).

Facts About Insurance Company Ratings

Ratings Philosophies, Methods, and Scales Vary From Service To Service

Each ratings service has its own ratings philosophy and methods. Some, like A. M. Best, believe that ratings can help insurance companies prevent insolvencies, whereas other services issue ratings primarily to inform consumers. Most base their ratings on both quantitative and qualitative data; others, like The Street.com, use purely quantitative data to rate companies.

Some services focus on a company's debt and claims-paying ability; others focus on investment portfolios and historical performance. In addition, there is no standardized scale that all ratings companies use. For instance, an "A" rating from A. M. Best is an "excellent" rating, whereas an "A" rating from Moody's is a "good" rating. When interpreting the rating a company has received, make sure you understand the ratings services' philosophy, methodology, and scale.

Ratings Are Not Foolproof, But They Can Reveal Important Information When Properly Interpreted

Ratings services all point out that ratings are no guarantee of the financial strength of an insurer, nor are they recommendations to buy a policy or product from a particular insurer. Ratings are merely opinions based on quantitative and qualitative data interpreted by insurance industry and financial experts. Ratings themselves shouldn't be used as the sole measure of a company's quality. Other things, such as reputation, claims-handling procedures, and customer service satisfaction, are also important.

However, ratings can reveal information about an insurance company's financial status that is difficult to obtain elsewhere. Be sure to ask for help in interpreting the ratings from an insurance professional. Unfortunately, cases exist where insurance companies received good ratings from one or more of the major ratings services and became insolvent shortly thereafter. Conversely, a company may receive a poor rating but never suffer severe financial difficulties.

Caution: Looking at the letter grades is not always enough. One thing to look for is a downturn in the ratings. For instance, a company may receive an excellent rating one year but only a good rating in the next. This can signal that a company is in trouble. Some ratings services also have watch lists of companies they believe may be showing signs of distress, as well as lists of good performers (i.e., companies that have consistently been highly rated).

Most Major Insurance Companies Are Rated, But They May Be Able to Request That Unfavorable Ratings Not Be Published

Most major insurance companies are rated by one or more ratings service. Some ratings services only rate hundreds of companies, while others rate thousands. Of the five major ratings services discussed here, three allow insurance companies that are rated unfavorably to request that these ratings not be published. The other two, Moody's and Weiss, will publish ratings no matter what the outcome. However, Moody's ratings are voluntary, so only companies that are sure their ratings will be favorable are likely to apply to be rated by Moody's. If you don't find ratings information on an insurance company in one ratings service listing, check with another ratings service.

You Can Find Ratings Information By Contacting The Ratings Service Directly, Through Your Insurance or Financial Professional, or At Your Local Library

You can find ratings information by contacting the ratings service directly, usually by calling its customer service department or by accessing its Internet site. Companies publish information in a variety of ways, depending on the level of detail. Most put out books, magazines, and/or reports, and some will quote you a rating over the phone. Some services, like A. M. Best and The Street.com, charge a fee for individual reports. Others, like Standard & Poor's and Moody's, publish some rankings on the Internet that you can access for free. If you don't want to contact the company directly, you can ask your insurance agent or financial planner to look up the information for you or find it in a ratings service publication in your local library.

  1. M. Best

Company Philosophy and Methods

  1. M. Best has been rating insurance companies longer than any other ratings service. Currently, A. M. Best rates more than 2,600 property casualty and more than 1,700 life/health companies, as well as 1,100 foreign insurers. The company's self-stated goal is to evaluate factors affecting the overall performance of an insurance company in order to rate the company on its financial strength, operating performance, and ability to meet its contractual obligations. To do this, A. M. Best gathers data and information from insurance companies and others, and advises companies on their ratings. Before being downgraded, companies are told what they can do to improve their rating and are given the opportunity to implement changes. A. M. Best believes it can best protect the consumer by serving as an advisor to insurance companies. Its ratings are intended to be an incentive for insurance companies to maintain optimum financial health and to prevent companies from becoming insolvent. Companies pay A. M. Best a $500 fee in order to be rated.

Ratings Classifications

Secure Companies

A++ and A+ (Superior) -- Assigned to companies that have demonstrated superior overall performance when compared to the standards established by the A. M. Best. A++ and A+ companies have a very strong ability to meet their obligations to policyholders over a long period of time. A and A - (Excellent) -- Assigned to companies that have demonstrated excellent overall performance when compared to the standards established by the A. M. Best. A and A- companies have a strong ability to meet their obligations to policyholders over a long period of time. B++ and B+ (Very Good) -- Assigned to companies that have demonstrated very good overall performance when compared to the standards established by the A. M. Best. B++ and B+ companies have a good ability to meet their obligations to policyholders over a long period of time.

Vulnerable Companies

B and B- (Adequate) -- Assigned to companies that have demonstrated adequate overall performance when compared to the standards established by the A. M. Best. B and B- companies have a good ability to meet their obligations to policyholders, but their financial strength may be vulnerable to unfavorable changes in underwriting or economic conditions. C++ and C+ (Fair) -- Assigned to companies that have demonstrated adequate overall performance when compared to the standards established by the A. M. Best. C++ and C+ companies have a current ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions. C and C- (Marginal) -- Assigned to companies that have demonstrated marginal overall performance when compared to the standards established by the A. M. Best. C and C- companies have a current ability to meet their obligations to policyholders, but their financial strength is very vulnerable to unfavorable changes in underwriting or economic conditions.

D (Very Vulnerable) -- Assigned to companies that have demonstrated poor overall performance when compared to the standards established by the A. M. Best. D companies have a current ability to meet their obligations to policyholders, but their financial strength is extremely vulnerable to unfavorable changes in underwriting or economic conditions. E (Under State Supervision) -- Assigned to companies that have been placed by a state insurance regulatory authority under any form of supervision, control, or restraint, such as conservatorship or rehabilitation, but does not include liquidation. May be assigned to a company under a cease and desist order issued by a regulator from a state other than its state of domicile. F (In Liquidation) -- Assigned to companies that have been placed under an order of liquidation by a court of law or whose owners have voluntarily agreed to liquidate. Note: Companies that voluntarily liquidate or dissolve their charters are generally not insolvent.

How to Obtain Ratings Information

  1. M. Best Company, Ambest Road, Oldwick NJ 08858 Phone: (908) 439-2200 Internet: www.ambest.com

Standard & Poor's

Company Philosophy and Methods

Standard & Poor's rates insurance companies on claims-paying ability and qualified solvency ratings. An insurance company's claims-paying ability is rated in order to assess the operating condition of the company and its ability to meet its present and future financial obligations to its policyholders. To assess a company's claims-paying ability, S & P analyzes company financial information and talks with company officials about their policies, philosophies, and financial management. Ratings are compiled by a committee that consists of senior insurance and financial specialists. If a company is about to be downgraded, S & P will allow the company to present information to prevent the downgrade. Ratings are voluntary, and insurance companies can request that their ratings not be published, although this happens infrequently. Companies pay S & P between $15,000 and $32,000 in order to be rated.

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Ratings Classifications

Insurer Financial Strength Ratings

AAA -- An insurer rated "AAA" has extremely strong financial security characteristics. "AAA" is the highest Insurer Financial Strength Rating assigned by Standard & Poor's. AA -- An insurer rated "AA" has very strong financial security characteristics, differing only slightly from those rated higher. A -- An insurer rated "A" has strong financial security characteristics but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings. BBB -- An insurer rated "BBB" has good financial security characteristics but is more likely to be affected by adverse business conditions than are higher-rated insurers.

An insurer rated "BB" or lower is regarded as having vulnerable characteristics that may outweigh its strengths. "BB" indicates the least degree of vulnerability within the range, "CC" the highest. BB -- An insurer rated "BB" has marginal financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments. B -- An insurer rated "B" has weak financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments. CCC -- An insurer rated "CCC" has very weak financial security characteristics and is dependent on favorable business conditions to meet financial commitments. CC -- An insurer rated "CC" has extremely weak financial security characteristics and is likely not to meet some of its financial commitments. R -- An insurer rated "R" has experienced a regulatory action regarding solvency.

The rating does not apply to insurer’s subject only to nonfinancial actions such as market conduct violations. NR -- An insurer designated "NR" is not rated, which implies no opinion about the insurer's financial security. Plus (+) or minus (-) -- When following ratings from "AA" to "CCC," either sign shows relative standing within the major rating categories.

Tip: Standard & Poor's also publishes short-term financial strength ratings.

How to Obtain Ratings Information

Standard & Poor's Corporation, 55 Water Street, New York NY 10041 Phone: (212) 438-2000 Internet: www.standardpoor.com

Fitch (Formerly Duff & Phelps)

Company Philosophy and Methods

Fitch (formerly Duff & Phelps Credit Rating Company) provides an assessment of the financial strength of an insurer and its capacity to meet its obligations to policyholders on a timely basis. Fitch does not rate the debt obligations of an insurer (unless otherwise stated). Ratings are based on a comprehensive analysis of relevant factors that determines the insurer's financial strength, including its operating performance, financial flexibility, balance sheet strength, management quality, competitive positioning, and long-term business viability. Ratings of BBB- and higher are considered secure, and those of BB+ and lower are considered vulnerable.

Ratings Classifications

AAA -- Exceptionally strong. Risk factors are minimal. The impact of any adverse business and economic factors is expected to be extremely small. AA -- Very strong. Risk factors are modest. The impact of any adverse business and economic factors is expected to be very small. A -- Strong. Risk factors are moderate. The impact of any adverse business and economic factors is expected to be small. BBB -- Good. Risk factors are somewhat high. The impact of any adverse business and economic factors is expected to be material, yet manageable. BB -- Moderately weak. Overall risk factors are high. The impact of any adverse business and economic factors is expected to be significant. B -- Weak. Risk factors are very high. The impact of any adverse business and economic factors is expected to be significant.

CCC, CC, C -- Very weak. Risk factors are extremely high. The impact of any adverse business and economic factors is expected to be insurmountable. A "CC" rating indicates that some form of insolvency or liquidity impairment appears probable. A "C" rating indicates that insolvency or a liquidity impairment appears imminent.

DDD, DD, D -- Distressed. An insurer has either failed to pay its obligations in a timely manner, is deemed insolvent, or has been subjected to regulatory intervention. A "DDD" rating indicates the highest prospect for resumption of business operations or, if liquidated, of having a majority of its obligations eventually paid off. A "DD" rating indicates a likelihood that the insurer will ultimately pay off 50 to 90 percent of its obligations. A "D" rating indicates a likelihood that the insurer will ultimately pay off under 50 percent of its obligations. NR -- Indicates that Fitch does not rate the insurer in question. Rating Watch -- Indicates that there is a reasonable probability of a rating change and the likely direction of such change.

How to Obtain Ratings Information

Fitch, Inc., One State Street Plaza, New York NY 10004 Phone: (212) 908-0800 Internet: www.fitchratings.com

Moody's

Company Philosophy and Methods

Moody's rates the debt securities of insurance companies. Its aim is to measure an insurance company's ability to pay claims and uphold financial obligations using both quantitative and qualitative data, including a company's investment portfolio, management strategy, and liquidity. Ratings are voluntary, but companies cannot ask that their ratings not be published, although ratings are continually reviewed and can be changed based on new information. Usually, only companies that are sure their rating will be favorable pay the $22,000 to $25,000 fee to be rated.

Ratings Classifications

Financial Strength Ratings Aaa -- Insurance companies rated Aaa offer exceptional financial security. While the financial strength of these companies is likely to change, such changes as can be visualized are unlikely to impair their fundamentally strong position. Aa -- Insurance companies rated Aa offer excellent financial security. Together with the Aaa group, they constitute what are generally known as high-grade companies. Aa companies are rated lower than Aaa companies because long-term risks appear somewhat larger.

A -- Insurance companies rated A offer good financial security. However, elements may be present that suggest a susceptibility to impairment sometime in the future. Baa -- Insurance companies rated Baa offer adequate financial security. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Ba -- Insurance companies rated Ba offer questionable financial security. Often the ability of these companies to meet senior policyholder claims and obligations may be very moderate and thereby not well safeguarded in the future.

B -- Insurance companies rated B offer poor financial security. Assurance of punctual payment of senior policyholder obligations over any long period of time is small. Caa -- Insurance companies rated Caa offer very poor financial security. They may be in default on their senior policyholder obligations, or there may be present elements of danger with respect to punctual payment of senior policyholder claims and obligations. Ca -- Insurance companies rated Ca offer extremely poor financial security. Such companies are often in default on their policyholder obligations or have other marked shortcomings.

C -- Insurance companies rated C are the lowest-rated class of insurance company and can be regarded as having extremely poor prospects of ever offering financial security. Moody's applies numerical modifiers 1, 2, and 3 in each rating classification. The modifier 1 indicates that the security ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.

How to Obtain Ratings Information

Moody's Investors Service, 99 Church Street, New York NY 10007 Phone: (212) 553-0377 Internet: www.moodys.com

The Street.Com (Formerly Weiss)

Company Philosophy and Methods

The Street.com is the newest of the ratings services. It has been publishing insurance company ratings since 1989 as Weiss. It's aim is to determine the probability that the company being rated will be able to pay future claims and determine the likelihood the company will become insolvent, taking into account the chances of a severe recession. Ratings are based only on quantitative information gathered from financial reports publicly filed with the National Association of Insurance Commissioners and financial data from other sources that are verified with the company being rated.

The rating is then determined using a computer model that analyzes risk-adjusted capital, profitability, liquidity, spread of risk, and sources of capital. Ratings are involuntary; companies do not pay to be rated, nor can they ask not to be rated. However, they are asked to look at and verify the analysis done and can supply new information that may improve their future rating.

Tip: When looking at The Street.com ratings, consider that it rates more companies average or below average than other ratings services.

Ratings Classifications

A Excellent -- Is given to companies that offer excellent financial security in severe economic conditions. B Good -- Is given to companies that offer good financial security in adverse economic conditions but this assessment should be reviewed in severe adverse conditions. The Street's recommended list of companies includes companies given a B+ rating or higher. C Fair -- Is given to companies that offer fair financial security and that are currently stable but that during times of economic downturn, the companies given this rating may not be able to maintain their financial stability. D Weak -- Is given to companies that The Street believes demonstrate significant weaknesses that could negatively impact policyholders, particularly in an unfavorable economic environment. E Very Weak -- This company currently demonstrates what The Street considers to be significant weaknesses and has also failed some of the basic tests used to identify fiscal stability. Therefore, even in a favorable economic environment, it is The Street.com's opinion that policyholders could incur significant risks. F Failed -- Company is under the supervision of state insurance commissioners.

How to Obtain Ratings Information

The Street.com ratings for all companies are published in the Insurance Safety Directory, issued quarterly. You can also obtain information on a single company in the form of a brief over-the-phone verbal rating, a 1-page summary, or an 18-page analysis. Contact the company at: The Street.com, 15430 Endeavor Drive, Jupiter, FL 33478 Phone: (800) 289-9222 Internet: www.weissratings.com

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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