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LTC Company Ratings

Understanding Insurance Company Ratings

When investing in annuities careful consideration must be given to the insurance company’s credit rating. It will not suffice to shop for the best annuity rates if the insurance company that issues the policy does not have the means or the credit history to suggest they will pay the investor. These ratings help establish the leaders in the industry and you will want to secure a position with the leaders.

Three major rating companies rate insurance companies.  A. M. Best Co , Standard and Poor’s and  Moody’s  rate insurance companies , but all use different criteria to establish a final rating. While that may seem confusing, it actually gives the consumer three different perspectives and helps them to make an informed decision as to the credit worthiness of the insurance company. These ratings rate the insurance company as a whole not just for annuity policies. A.M Best Co. evaluates a company’s relative financial strength and overall performance in comparison with others. Standard and Poor’s uses a different criteria, and they assess a company’s claims paying ability or, its financial capacity to meet its insurance obligations. Moody’s evaluates financial strength. These are opinions of the relative strength or weakness of individual insurance companies.

All the companies use an alphabet scale or letter grades to assign ratings, although each uses their own unique system. A.M. Best uses letter grades ranging from A++ (Superior), the highest, to F (In Liquidation), the lowest S&P’s rating scheme uses a letter grade scale that ranges from AAA (highest) to R (lowest),. Moody’s uses a letter grade scale that ranges from Aaa for the highest rating to C for the least favorable rating. 

This will seem overwhelming at first and your investment adviser can help you sort through these ratings. Evaluate all ratings before buying an annuity. These ratings provide a valuable resource for evaluating your selections. So who has the best annuity rates? That would be the company that will honor their obligations.

What's the Comdex?

The Comdex is not a rating, but a composite of all the ratings a company has received.

The Problem with Ratings

Ratings have become one of the most important pieces of information about a life insurance company. They provide a reference to judge the financial health of a company, and a way to compare one company to another.
Unfortunately the services don't use a universal ratings scale. Two services use the " A through F" scale, but they each apply it very differently. Two other rating services use the same "triple-A" scale used in rating bonds.

There is also the problem of "crossover," where the same letter rating is used by two different rating companies and has two different meanings. For example, and "A+" from Best is the second highest rating that can be assigned, and is not considered an excellent rating. Comparisons of letter ratings between the rating services are useless.

The Comdex Solution

In order to clear up some of the confusion, it is necessary to take a step back from the letter ratings themselves. The actual letter rating that is assigned to a company is not as important as the number of companies that are rated higher or lower than the company.

A better way to look at the ratings is to look at the percentiles that the ratings represent. The percentile gives the percent of insurers that are ranked lower than a given company. If a company is in the 80th percentile, 20% of the companies are ranked higher and 80% are ranked lower. This is the common way of reporting test results for most national student testing. When considering a large number of students, the absolute test score is not as important as the percentile, the percentage of students that scored better and the percentage of students that scored worse.

We calculate a composite index, the Comdex, which is the average percentile of a company's ratings. The Comdex is not a rating itself. It is a composite of all of the ratings that the company has received. The Comdex gives the company's standing, on a scale of 1 to 100, in relation to other companies that have been rated by the services. It is an objective value based solely on the mathematical distribution of all of the companies that have been rated.

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