Our financial strength ratings are based on a complex analysis of hundreds of factors that are synthesized into a series of indexes: capitalization, investment safety (Life & Annuity and Health companies only), reserve adequacy (Property & Casualty companies only), profitability, liquidity, and stability. These indexes are then used to arrive at a letter grade rating measured on a scale from A to F. 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.
The ratings are derived, from annual and quarterly financial data provided by SNL Financial LC, the National Association of Insurance Commissioners and State Insurance Regulators. This data may be 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. (See Rating Definitions).
Indicates whether the rating has recently changed.
The percentage of the company’s investment portfolio from the annual report dedicated to real estate investments. These include (a) property occupied by the company; and (b) properties acquired through foreclosure. A certain amount of real estate investment is considered acceptable for portfolio diversification. However, excessive amounts may subject the company to losses during a recessionary period.
Insurance risk acquired by taking on partial or full responsibility for claims on policies written by other companies (see Reinsurance Ceded).
Insurance risk sold to another company. When there is a claim on a reinsured policy, the original company generally pays the claim and then is reimbursed by its reinsurer.
A Weiss index that uses annual and quarterly data to measure the adequacy of the company’s reserves. Reserves are funds the company sets aside to cover unsettled claims it estimates each year. Included are claims that the company has already received but have not yet been settled and claims that they expect to receive, but which have not yet been reported.
If a company consistently estimates its claims accurately, that is good. Or if it errs on the side of being conservative and overestimates its claims from time to time, that is even better. Either case will cause this index to move higher.
On the other hand, some companies may have trouble accurately predicting the claims they will have to pay. Others may intentionally underestimate their claims to inflate their profits for stockholders or to make their capital appear higher than it really is. In either case, inadequate reserve levels will result in a low Reserve Adequacy Index.
If a company has chronically deficient reserves, it calls into question the company’s ability to manage its policy risk effectively.
The ratio of reserves for expected claims compared to the company’s capital and surplus level. If a company does not set aside enough reserves, it may have to withdraw capital to pay claims. This ratio, calculated from the annual report, is a rough measure of how much capital cushion the company has against claims reserves. The industry average is around 180 percent.
This ratio examines the adequacy of the company’s capital base and whether the company has sufficient capital resources to cover potential losses which might occur in an average recession or other moderate loss scenario. Specifically, the figure, calculated from annual and quarterly data, answers the question: For every dollar of capital that we feel would be needed, how many dollars in capital resources does the company actually have?
You may find that some companies have unusually high levels of capital. This often reflects special circumstances related to the small size or unusual operations of the company.
This is similar to the Risk-Adjusted Capital Ratio #1. But in this case, the question relates to whether the company has enough capital cushion to withstand a severe recession or other severe loss scenario.