Insurance Company Rating Agencies

[chinaco]

There are several companies that rate the financial strength and claims paying abilities of insurance companies.

Several of the commonly known ones are:

1. AMBest
2. Fitch
3. S&P
4. Moodys

I think a couple of the rating companies (listed above) were criticized as not doing a sufficient job rating bonds during the MBS meltdown.



There is also a rating agency named Weiss. Anyone familiar with Weiss? If so, do you think they are a better judge of the soundness of an insurance company?

It seems that Weiss claims to be a bit tougher on the insurance companies than the first 4 agencies listed.


Weiss Ratings vs. A.M. Best a Comparison


Weiss Ratings
http://www.weissratings.com/help/Ratings-Info.aspx#3

Weiss Ratings represent a completely independent, unbiased opinion of an insurance company's financial safety — now, and in the future. The ratings are derived, for the most part, from annual and quarterly financial statements obtained from state insurance commissioners. This data is supplemented by information that we request from the insurance companies themselves. Although we seek to maintain an open line of communication with the companies being rated, we do not grant them the right to influence the ratings or stop their publication.

Weiss Ratings are assigned by our analysts based on a complex analysis of hundreds of factors that are synthesized into a series of indexes: capitalization, investment safety (L&H companies only), reserve adequacy (P&C companies only), profitability, liquidity, and stability. These indexes are then used to arrive at a letter grade rating. A good rating requires consistency across all indexes. A weak score on any one index can result in a low rating, as insolvency can be caused by any one of a number of factors, such as inadequate capital, unpredictable claims experience, poor liquidity, speculative investments, inadequate reserving, or consistent operating losses.

Any insight would help.

Thanks.

 

[brewer12345]

As it happens, I worked as a ratings analyst covering insurance companies at one of the traditional ratings agencies. I imagine that colors my perceptions, but I have no particular love for the agencies (there are good reasons I moved on) and I probably know more about the insurance ratings process than any layman. A few thoughts:

- With one possible exception that I am aware of (AIG, but its a weird case), the teams of analysts who rate life and P&C insurers had/have nothing to do with ratings on structured paper: separate teams, separate business units, separate management and very diferent compensation structures. The insurance ratings teams establish their ratings based on a combination of quantitative analysis of insurer financials, the results of their own capital adequacy models, views of insurer management teams' risk appetite and capabilities, and the external environment affecting these companies. The traditional agencies are typically in posession of quite a lot of material, non-public information from the rated insurers and regularly meet with insurer management teams to have the latest and most in-depth information that is usually not publicly available. While analyzing financial fundamentals is an important component of establishing a rating, these companies are usually quite complex and subject to management's actions so financial analysis simply is not enough to really know what is going on at a particular company.

- In the US market, Fitch is an also-ran (but they are the equal of Moody's and S&P in Europe). Weiss is a failed business that sold out to TheStreet.com. AM Best rates almost every insurer doing business in the US, even tiny mutuals nobody but their policyholders have heard of. Moody's and S&P have lots of analytical resources and extremely good information, but only rate the largest insurers in the life and P&C industries.

- AM Best uses a different rating scale than Moody's and S&P. The latter use the familiar AAA/AA/A/BBB/BB/B/CCC scale. AM Best has its own scale, namely A++, A+, A, A-, B++, B+, B, B-. The rating bands for AM Best loosely translate as follows: A++ = AAA and strong AA, A+ = Middling to weak AA and strong A, A = Strong to middling A, A- = Weak A, B++ = BBB. I would really only be interested in doing business with an A++ or A+ AM Best rated insurer.

- "Tougher" does not mean more accurate with respect to ratings.

As someone who has rated insurers, invested in them at all levels of the capital structure, and bought insurance based partially on ratings, I pay a lot of attention to S&P, Moody's and AM Best. I ignore Fitch and wouldn't even bother to look up a Weiss rating.

 

[chinaco]

Thanks

 

[chinaco]

It looks like Weiss bought the rating agency (from thestreet.com) in mid 2010.

Perhaps they see new opportunity in the risk analysis business.

 

[brewer12345]

It looks like Weiss bought the rating agency (from thestreet.com) in mid 2010.

Perhaps they see new opportunity in the risk analysis business.

Could be. But they have a long way to go to build anything like the track record Moody's, S&P and AM Best have with insurance financial strength ratings.

 

[pb4uski]

As someone who has rated insurers, invested in them at all levels of the capital structure, and bought insurance based partially on ratings, I pay a lot of attention to S&P, Moody's and AM Best. I ignore Fitch and wouldn't even bother to look up a Weiss rating.

I used to work for an insurance company and still work in the industry. I would echo the above other than I don't necessarily have the negative view on Fitch that brewer has.

Moody's, S&P, and Fitch are all pretty good and cover most of the bigger companies. AM Best is good as well and more pervasive (rate more companies). Weiss are also-rans.

The insurance industry really weathered the storm quite well during the downturn. AIG's problems had nothing to do with their insurance subsidiaries, but were principally problems in their financial products division.

 

[Thingamajigger]

I used to work for an insurance company and still work in the industry. I would echo the above other than I don't necessarily have the negative view on Fitch that brewer has.

Moody's, S&P, and Fitch are all pretty good and cover most of the bigger companies. AM Best is good as well and more pervasive (rate more companies). Weiss are also-rans.

The insurance industry really weathered the storm quite well during the downturn. AIG's problems had nothing to do with their insurance subsidiaries, but were principally problems in their financial products division.

any opinion on buying some preferred shares of a company like Arch Capital Group?

... Arch-A is paying about 7.5%

 

[brewer12345]

any opinion on buying some preferred shares of a company like Arch Capital Group?

... Arch-A is paying about 7.5%

Nothing wring with Arch, but that is the sort of security you buy when the price plunges. Otherwise you are getting an equity risk with capped upside and big downside.

 

[Thingamajigger]

Nothing wring with Arch, but that is the sort of security you buy when the price plunges. Otherwise you are getting an equity risk with capped upside and big downside.

thanks for the reply ... I am trying to get a handle on investing in preferred stock ... much less info out there through regular google searches on preferred stock ... and the discount brokerages have limited info available too

I am learning that some preferred securities are redeemable ... so the benefit could be lost anyways