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 United States Government no longer has a perfect credit score. On August 5, 2011 its credit rating was lowered by Standard & Poor’s to AA+ from AAA. The rating on the debt of the federal government and some specific agencies such as mortgage giants Fannie Mae and Freddie Mac was lowered because S&P deemed it more risky due to the ballooning federal debt and the inability of the political process to reform entitlement programs.

In theory the four top rating agencies – Standard & Poor’s, Moody’s, A.M. Best and Fitch’s – are the arbiters of the Country’s credit score. Despite all the sound and fury from the politicians in Washington, there are some real-life implications for people on Main Street. The lowering by S&P by one notch effectively brings the country’s FICO score down to something like 775 from 800.

It’s not that dramatic since only one of the top four rating agencies took such a drastic approach (the others said the Government’s problems are long-term and would not immediately affect their ratings). I’d like to note that some smaller agencies had already taken the politically unpalatable step of lowering the country’s rating. Let’s also keep in mind that S&P has been under serious political pressure to “get real” about its rating since it did such a pathetic job of rating all of those toxic mortgage-backed securities (see “The Big Short”).

Given all of the political pressure from Congress regarding the mortgage securities fiasco of the last three years, it’s ironic that they should come to downgrade the U.S. Government’s rating. Expect to see “show trials” (i.e., Congressional hearings) in Washington demonizing the rating agencies. Again, it’s ironic since the U.S. has been less than reliable when accounting for future liabilities such as Social Security and Medicare.

But, again, let’s put politics aside and investigate the “real life” implications of the aforementioned “downgrade:”

Insurance Company Ratings: What Do They Mean?

In tandem with the downgrade of the Government’s credit rating, S&P also lowered the AAA rating of a handful of the most stellar insurance companies. They also put the rest of the insurance industry on a “Negative” outlook (downgraded from “Stable”), mainly because of the heavy exposure they all have to U.S. securities in their reserve portfolios.

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

Companies rated AA+ with “Stable Outlook” reduced to “Negative Outlook:”
Guardian Life Insurance Company of America
Berkshire Hathaway, Inc.
Assured Guaranty Corp.
Massachusetts Mutual Life Insurance Co.
Western & Southern Financial Group, Inc.

Does this mean that your life insurance company is about to go bankrupt ? Most likely, not. What it does mean is that S&P has decided that insurance companies that invest heavily in one country’s bonds can not have a higher credit rating than the actual bonds that they hold. So, in lockstep, if the U.S. rating goes down, so must the companies that hold a lot of U.S. debt. Needless to say, the affected insurance companies say they are unfairly being hit due to Washington’s political gridlock and that they still merit AAA ratings.

Going forward, the insurance companies will bolster their overall credit ratings by selling off their lower quality assets and buying higher quality ones. This may effectively improve their balance sheets over the long term and even increase their exposure to U.S. debt instruments. S&P maintained AAA ratings on many municipal bonds, so there still are high-quality assets for the insurance companies to put into their reserves. The reason the top handful of companies actually had the best ratings is that often they are better judges of quality than even the rating agencies.

The lowering of the U.S.’ credit rating, in the immediate term, has not led to a sell-off in U.S. Treasury assets. But indeed, we have seen a “flight to quality” as many investors see the U.S. Treasury Bonds as the “cleanest shirt in a hamper full of dirty shirts.” (I believe I can credit economics guru Nouriel Roubini for this analogy on Bloomberg Radio). In effect, U.S. assets at AA+ are still better quality than many European bonds.

Ultimately, the jury is still on whether interest rates on mortgages and credit cards will spike up. Longer term interest rates will be affected more by the strength or weakness of the overall economy and the amount of stimulus provided by the Federal Reserve and Congressional budget committees.

Why Ratings Still Matter

So why do we even care about ratings attributed to countries or businesses or individual financial products? Haven’t the rating agencies done an awful job to date? Are the folks with the green eyeshades who are crunching the numbers and giving their seal of approval so corrupted by the profit motive or fearful of political retaliation that they can’t “do the math” objectively?

In short, there are two reasons: First, we need some type of financial yardstick to compare countries, companies and bonds. There really are no guarantees associated with a rating of “AAA,” for example. It’s just a relative measure and only useful when compared to something with a “B+,” for example. Secondly, a rating gives us the assurance that someone who is somewhat objective with some kind of sophisticated financial education has looked at all the footnotes and read all the fine print… because G-d knows nobody else has (sometimes not even the salespeople). Of course, recent events have dramatically shown that the current system has failed. Unfortunately, it’s the only system we have.

So let’s take a look what the ratings of life insurance companies really mean. Given the hundreds of life insurance companies offering policies in the U.S. it can be a challenge to compare their relative financial strengths and ability to pay claims. The top rating agencies review in detail the accounting statements of publicly traded companies as well as private or mutual life insurance companies. Based on their reviews and further research into competitive intelligence and other sources, they will give an opinion on the credit-worthiness of the life insurance company and assign letter grades to each company and its subsidiaries. Furthermore, agencies will often note what direction they think future rating will head in their “outlook” for the company or industry.

Keep in mind that while the core attribute the rating agencies look at is “financial strength,” they also take into account how well the company operates as a business, the size of their market share, exposure to other businesses (such as investment management advice or property & casualty lines) and overall business mix. For example, every year, S&P positively noted New York Life “outstanding field 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 the hundreds of available life insurance companies out there, does it make sense to go with a middle-tier company when there are already so many top-notch ones? Similarly, with all the five star mutual funds rated by Morningstar, why would you invest in a three star fund? A life insurance company’s rating 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.

Keep in mind that many companies have subsidiaries that have similar sounding names (often due to state regulations or their own business strategies). When researching your specific company make sure that you are looking at the actual company that is underwriting the life insurance contract. For example, “MetLife” may actually be “MetLife Investors” if it is the 30-year term plan in New York. Your agent should be able to give you the exact company name. Your state insurance commission will have regular filings from each company that sells life insurance it that state.

Each rating agency uses its own proprietary methodology and mathematical model to assess the strength of the insurance companies they review. They look at factors such as the quality of the insurer’s assets and reserves; their source(s) of funding; profitability based on a review of public financial records and filings; market share in different product categories; management talent; and competitive market analysis compared to other insurers.

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	BB+	5.3
12	C- Weak	BB Marginal	Ba2 Questionable	BB	5.0	40
13	D Poor	BB- Marginal	Ba3 Questionable	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 Agencies
AM Best
Fitch
Moody’s
Standard & Poor's
Weiss
Comdex Score

Three Simple Steps to Avoid Probate

Tricks of the Trade: Three Simple Steps to Avoid Probate
by Richard F. O'Boyle, Jr., LUTCF, MBA

Much is said about the value of avoiding probate, the legal process where your will (if you have one) is validated and its provisions carried out. Complicated estates can be tied up for years with legal maneuvering and family wrangling. Most cases are straight-forward and uncomplicated – but they can still be time-consuming and emotionally draining.

First, you can free up some resources for your heirs by carefully naming them as beneficiaries on savings and checking accounts, adding them to the title of a car or boat, or including them on the deed of a piece of real estate. Designating some assets as “payable on death,” “transfer on death” or “in trust for” can accelerate the transfer of these assets to your intended beneficiaries. They just need to show copies of their identification and your death certificate to the bank or motor vehicles department.

If you are concerned that your heirs will have trouble paying taxes or expenses immediately after your death, carefully take stock of your smaller assets. This is particularly helpful for people who do not have a will or are not legally married to their spouses. You can free up these resources for them while the estate works itself through the probate process.

Second, most of your big assets such as your house, life insurance, pension, retirement plan or investment account should already have named beneficiaries or joint owners, which means they pass to the intended person (or trust) immediately upon death and avoid probate. Make copies of the signed and dated beneficiary designation forms and keep them in a safe place with your other financial records. Banks and insurance companies are not infallible – they lose these documents all the time! Make sure that you name contingent beneficiaries and tertiary beneficiaries. The last thing you want is for these important assets to wind up in your estate. They will be subject to death taxes, the vagaries of the probate process and (in the case of IRAs) immediate taxation.

Finally – but most importantly – make sure that you have a will. While this doesn’t “avoid” probate, it simplifies the process dramatically. If you have minor children, an unmarried spouse or even remotely complicated family affairs, at a minimum you should have a simple will. Attorneys can prepare a simple will for a few hundred dollars or you can use a software product or online service for a fraction of that cost. If you don’t already have a will, or it hasn’t been updated since you have had major changes in your life, make it a point to get one signed before the end of the year.

Book Review: “Buckets of Money: How to Retire in Comfort and Safety”

“Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP (John Wiley & Sons, Inc., 2004)
by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com


We’re taught to save throughout our working years to fund our retirement – diligently socking money into our 401(k)s and paying down our debt. But once we flip the switch and settle into a presumably worry-free retirement, how do we effectively and efficiently spend down our assets in those golden years? Ray Lucia, a Certified Financial Planner with a celebrity’s flair, helps us to answer this tough question with his “buckets of money” planning strategy.

The gist of “Buckets of Money” is that our nest eggs should be separated into three “buckets” of ultra-safe income streams, conservative medium-term assets and aggressive stock funds. Over seven-year cycles, the funds are depleted and shifted into the next immediate bucket to be used for current income. The buckets strategy leaps the key retirement planning hurdle by providing safety, growth, diversification, tax-efficiency and lifetime income. The book identifies which investments are appropriate for which buckets, along with guidelines for the proportions of each.

The book reads like a infomercial, but don’t let that turn you off. The general discussion of asset classes and products (stocks, bonds, annuities, etc.) is valuable for the novice and experienced investor alike. His comprehensive perspective honestly allows him to cover all potential investment classes. Mr. Lucia isn’t trying to sell you on anything other than his planning strategy (and he does that well).

Mr. Lucia’s website contains some notes on changes, but I’d like to see a fully updated edition of the book. For example, the buckets strategy recommends real estate holdings of as much as 20% of a portfolio in the form of real estate investment trusts. Given the 2008 mortgage meltdown, perhaps that should be reconsidered. Mr. Lucia only skims past the important backstop that life, disability and long-term care insurance provide as we switch our retirement portfolio from accumulation mode to distribution mode. Fortunately, the author takes into account the complexities of the tax code since intelligent tax planning can make or break a retirement plan. The book’s numerous statistical examples remain useful today.

The worksheets included in the book are quite easy to use. While the potential to “do it yourself” is there for the experienced investor who has a trusted advisor, I wouldn’t recommend that an individual adjust her portfolio without consulting a professional. I’m not sure if the buckets strategy is an “all or nothing” approach to investing. Any retirement plan can benefit from the non-controversial concepts presented here.

Book Review: “The Complete Guide to Reverse Mortgages,” by Tammy Kramer and Tyler Kraemer

“The Complete Guide to Reverse Mortgages,” by Tammy Kramer and Tyler Kraemer (Adams Media, 2007)
by Richard F. O'Boyle, Jr., LUTCF, MBA
"The Insider's Guide to Retirement and Insurance Planning"
http://www.retirementandinsurance.com


Tammy and Tyler Kraemer do professional advisors and consumers a valuable service by demystifying reverse mortgages. The sale of reverse mortgages has boomed in the past 20 years as house-rich/cash-poor retirees seek to tap into their home equity to fund their golden years. “The Complete Guide to Reverse Mortgages” details and explains the many benefits and pitfalls of these complex and poorly understood financial products. Every professional advisor should read this book, along with every consumer seriously considering one.

Over the last three or four years I have seen a surge in published articles (good and bad) on reverse mortgages. This is mainly because our retirement investments have failed to produce the expected pile of money to live off of. Up until 2008 (the year after this book was published) our home values had increased beyond rationally expected levels. The perfect storm of crashing investment accounts, crimped budgets and plummeting home equity values makes the consideration of a reverse mortgage even more pertinent.

“The Complete Guide to Reverse Mortgages” is a consumer-friendly volume with useful worksheets and illustrations. If you are a senior considering a reverse mortgage (or adult child of one), take 30 minutes to pencil through the worksheets. Better yet, sit down with a financial advisor or mortgage specialist and do them together. Don’t hesitate to float the idea past intelligent friends, your family attorney or a neighborhood insurance agent. The consumer is well-advised to carefully network to find a reputable reverse mortgage specialist. You may bring any financial advisor along with you to a consultation. By speaking with a variety of advisors, you will be sure to explore the fullest spectrum of options. This is a financial purchase you should be extremely cautious about because it’s a long-term commitment.

Many things have changed in the reverse mortgage market since the 2008 financial meltdown so on February 25, 2011, I spoke with Jim Calimopulos, Reverse Mortgage Sales Manager at Worldwide Capital Mortgage Corp. in Bay Shore, NY.

Mortgage rates and the costs of reverse mortgages in general have increased, and property values have decreased, which means that less money is ultimately put into a consumer’s pocket when they take out a reverse mortgage. The highly publicized failure of IndyMac bank (one of the largest reverse mortgage providers) has fortunately not made a great impact on the availability of these products to consumers since other companies such as Financial Freedom and MetLife continue to be strong players.

Since 2010, the Department of Housing and Urban Development’s Home Equity Conversion Mortgage program has sought to lower some costs and provide more options to consumers. As Mr. Calimopulos explained, if a couple is downsizing their home and moving into a new home, they can greatly benefit from the HECM program. For example, if they sell their home for $300,000 and then buy a $250,000 home in a 55+ community, they can still get a reverse mortgage for up to $190,000 on the new property. Ultimately, the couple will have about $110,000 in cash to put aside for use in the coming years.

Positive Changes For Diabetics In The UK Critical Illness Market

For a long time the provision of critical illness cover in the UK for diabetics has been extremely limited. Where critical illness cover has been available it has come with significant exclusions for cardio vascular risks, the very critical illnesses that would be of most interest to those with diabetes.
The good news is that significant changes are taking place which mean that for some diabetics we are now able to arrange critical illness cover without any exclusions. As specialists in the proctection market for people with health conditions welcome this excellent new development which we believe will be of real benefit to many diabetics.  Diabetics wishing to make enquiries should visit http://www.moneysworth.co.uk/ or call 0845 430 5200     

Breast Cancer - Positive News On Life Insurance and Critical Illness Cover

We wanted to share some good news.

We were recently approached by a lady who was looking for life insurance. Aged in her late 50's our client had suffered from breast cancer a number of years ago from which she had been in complete remission for a number of years. She also had one or two other conditions which while less significant would often with most insurance companies result in having to pay additional premiums.

The good news is that we were able to obtain life cover for this client at ordinary rates with no increase in premium to cover her previous serious health condition. The life cover includes full cover for death by whatever cause, including cancer(and including breast cancer) and the premiums are guaranteed not to increase in the future.

This is a great result!

The outcomes for life insurance applications from people who have suffered breast cancer in the past,l depend upon a number of factors.

Firstly the person must be in remission.

Secondly it is more common for there to be additional premiums charged to cover the extra perceived risk.
The amount of extra premium will typically depend on a number of different factors including the amount of time since the end of treatment (surgery, radiotherapy or chemotherapy) and the original sizing and staging. Not every life insurance company will rate the same way and this is where it pays to use the services of a specialist broker such as Moneysworth. In the above case we were able to obtain  £45,000 for less than £30pm.

It is also worth mentioning critical illness cover.

It is often assumed that critical illness cover is not available for anyone who has been previously diagnosed with breast cancer. However while this remains true for some cases it is no longer necessarily correct in all cases. For cases where the initial staging was low and where some time has passed since treatment finished, not only might it be possible to obtain critical illness cover, it may also be possible to do so at very competitive premium levels too. Any future episodes of breast cancer will be excluded from the list of critical illnesses covered, as will any other critical illness which is caused by the initial breast cancer, but apart from that the full range of other critical illnesses normally available will be included in the policy.

So, if you have had breast cancer in the past, your prospects for both life cover and critical illness cover could be brighter than you think.
 

How long after a heart attack before I can apply for life insurance?

How soon can someone apply for life insurance after suffering a heart attack?

This is a question we are often asked as we receive an increasing amount of enquiries from people who have suffered a heart attack (myocardial infarction). For those affected it is not surprising that their minds should turn to this subject. For having survived a heart attack we are normally given a little while to recover and for many this provides time to consider what the future might hold, especially for our familes and those who financially depend upon us.

For some it can be worrying to realise that they have insufficient life cover to repay the outstanding balance on the mortgage. This means that in the event of their death, amidst and that that would mean to their nearest and dearest, the family home may be at risk as well!

The mind then turns to questions about how difficult it might be to obtain life insurance following a heart attack and how long it might take to arrange for cover to be in place..............

Well generally speaking the prospects are often better than might at first be assumed.

Firstly if you were over the age of 40 at the time of your heart attack and you have only had one heart attack there is a good chance that you will be able to obtain life insurance. However if your heart attack was severe or if you have further health conditions (eg diabetes) then you may find it difficult to obtain life cover.

Just how long it will take to obtain life cover after your heart attack will vary from one insurance company to another. Generally speaking most life insurance companies will be prepared to offer you cover twelve months after the heart attack and some will even consider offering terms six months.

It may even be possible to do even better than that! We know one or two life companies who may consider applications one month after the client suffering a heart attack, depending on the overall picture.

So if you, or someone you know, has recently suffered a heart attack, if you are worried that you have insufficient life cover in place to sufficiently protect your family, if you think its probably too late to get life cover......... don't despair. It might be easier to get life cover than you think.