Life Insurance Company Ratings

It’s amazing the dishonesty in the life insurance industry concerning life insurance company ratings. I remember, seventeen years ago when two financial planning agents were telling me that they were selling an insurance company (we’ll call company A) which was rated by A.M. Best (a rating company for the insurance industry) an A-. The grade of A- sounds pretty great to me, and sounded pretty great to all of their clients. Since, I am analytical, I asked a new company (called Weiss Ratings) to give me an un-biased rating of the insurance company. Weiss faxed backed to me a rating of D- (which seamed pretty horrible to me). I told the two planners the analysis from Wiess, and I advised the two planners they should stop selling this annuity product immediately (and send out a letter of concern to their clients).

The two planners became outraged that I would be giving them advice, since they have been financial planners for 25+ years, and told me that Weiss new nothing about financial planning or the industry as a whole. Well, a couple of days went by, and the insurance company went under…and so did these two planners.

The moral to the story is, always double check the ratings of an insurance company by an un-biased source…before you purchase an investment product from an insurance agent.

Each insurance company which transacts business in your State must follow certain guidelines concerning their ratings in relation to the amount of assets they must set aside in capital & surplus incase there is a run on the companies assets in case of failure. The better the rating of the insurance company, the more capital the insurance company must set aside in capital & surplus in case of failure. The better the rating of the company, the lower the yield on its products…since the insurance company must set aside higher quality grade bonds & other assets in its books to support those ratings.

What do insurance agents do? They sell products from insurance companies with lower ratings, which have higher yielding products. By selling products from insurance companies with lower ratings, the insurance agent is able to compete against higher yielding (taxable) products. But the caveat to this problem is…if the insurance company goes under, the investor will suffer (either by reduced payouts or a deferral of principal owed).

There have been over 29 insurance company bankruptcies since the year 2000. The companies that have failed, those insurance companies had between 35 million to 3.5 billion in assets. Out of these failures, most of these insurance companies had a “D or E” ratings (although there was a couple of failures in the C- rating).  This tells you to stay away from any companies that are rated less than B- and/or have less than 3.5 billion in assets.  

In addition, check for the following:

• Large Holdings of BBB Rated Bonds, Mortgages, and Significant Holdings of Junk Bonds to Capital. Or, A Negative Return on Equity or Negative Cash Flow.

If an insurance company fails, most State guaranty associations do not set aside funds in advance. But, contributions from other insurance companies are contributed after insolvency occurs. If an insurance company fails, all deferred annuity products are acquired by the new company taking over the failed company, and a 3 or 4 year hold on liquidations are put into place. So the deferred annuity owner will not lose money, since the annuity company will not allow the owner to liquidate the account until the insurance company recoups the original investment principal. On the other hand, the immediate annuity owner who is receiving money on a monthly basis will normally lose 25% of their payout amount…since the new company is buying the insolvent insurance company assets at a 25% discount.

The bottom line, be careful of all companies rated below a B- rating (by Weiss), or have less than 3.5 billion in assets. You’re investing to make certain you do not lose money…so take the added caution of analyzing the insurance company “true” un-biased ratings before investing, by going to: www.weissratings.com.  

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com