DeathandTaxes.com

Research is the Best Policy

If you’ve spent more time planning your vacation than you have researching your insurance portfolio, you could be in for an unpleasant surprise.

by JJ MacNab 

Insurance company failures are on the rise.  The number of insurers who went under in 2000 increased by 30% over the prior year as a result of increased competition and the slowing economy.  To make matters worse, some of the leading industry analysts are predicting rocky times ahead for life and annuity companies.  And, if the new Administration’s tax plan succeeds, the repeal of the estate tax combined with a reduced capital gains tax rate could effectively knock the feet out from under those companies who rely too heavily on the tax aspects of insurance products to make their sales.

If you think you might need your insurance coverage for more than 10 or 15 years, it is imperative that you choose your insurance carriers carefully and continue to monitor those companies on a regular basis.  While no one can accurately predict a company’s viability twenty, thirty, or forty years down the line, you should do everything you can to avoid the time and expense of watching your carrier struggle through receivership and sale.  Just ask the policyholders at Mid-Continent Life, an Oklahoma-based life insurance company who was taken over by the state Insurance Department in 1997.  Almost four years later, the fate of the 130,000 policyowners is murky at best.

While those who are making a substantial commitment to invest in a large portfolio may want to consider the services of an insurance analyst or independent consultant, a growing number of consumers are turning to the Internet for their information.

Many ‘net-savvy consumers are pros when it comes to looking up and analyzing financial data on stocks, bonds, and mutual funds.  Performing insurance company due diligence, however, presents a new challenge.  Fortunately, many of the leading sources of information have recently made their ratings and analysis available to the online public and almost all of it is free.

Due Diligence Basics

Whether you are researching a prospective company or are performing a periodic review of the policies in your portfolio, the most important thing you can do is accurately identify the insurance company in question.  For example, your agent has recommended a policy with Security Life.  Is that Security Life of  Denver, Security Life and Trust, or Security Life of America?   Find out for sure.  

Secondly, don’t get caught in the trap of simply comparing two companies and choosing the better one.  Instead, hold each company up to a pre-determined set of benchmarks.  If an insurance agent wants to sell a particular company or product, it is not uncommon for her to offer two or three alternatives that look worse than the one she wants to sell. 

And finally, don’t assume that it costs more to purchase insurance from a top-rated company.  Remember, product illustrations are poor indicators of how a policy will perform. Since insurance companies generally have comparable expenses, reserve requirements, and overall investment strategies, buying from the best does not necessarily result in higher premiums. 

Third Party Ratings and Financial Data

There are five major rating firms that analyze life insurance companies on a regular basis, and four of these offer their ratings and analysis online for free: 

• AM Best - Simply enter the name of your company under the “Search Ratings” category and in addition to providing you with an up-to-date rating, under the various folder tabs you will find the following: 1) the age of the company (a minimum of 50 years’ experience is recommended); 2) the corporate address; 3) the company ownership structure (stock or mutual); 4) the Financial Size Category (recommended minimum is IX); 5) the business overview, and 6) the history of the company including any mergers and acquisitions.  In addition to this free data, AM Best also offers a complete company report for $19.95 which provides financial statistics for the past five years.  But unless you’re proficient at interpreting insurance company financials, this report may prove rather overwhelming.

• Standard & Poors - To access the Insurer Financial Strength Ratings, click on the “Ratings Lists” link, and then choose the “Insurance” category.  When you have located your company, the resulting report is quite detailed.  In particular, pay attention to the following data: 1) total assets for five years (goal is moderate growth over this period with a recommended minimum of $2 billion in assets); 2) total liabilities (should experience roughly the same growth rate as total assets); 3) net income (should remain relatively stable); 4) business review and history; and 5) a pie chart indicating the company’s product sales.  This last category is particularly important in times of change.  If a company sells too much of any one product type (individual annuities, or permanent life insurance, for example) a sudden shock to the marketplace such as a change in the economy or tax system, could result in a sharp decline in the company’s business.  Lack of product diversification was a leading factor behind the failure of Mid-Continent Life.   The company primarily marketed one policy type and when that product proved to be underpriced, the entire company was at risk.

• Fitch - The Financial Strength Ratings Reports can be found under the “Insurance” category.  In addition to a letter rating, the Fitch website will provide you with a detailed business review and overall outlook for the company.  In particular, you should pay attention to the following: 1) the product mix (life, annuities, group insurance); 2) the company’s marketing focus (upscale and advanced marketing is usually a sign that much of the company’s business is tax-oriented; 3) the primary states where the company sells insurance (diversification between several states is advised); 4) the company’s reinsurance practices, and 5) the quality of the assets in which the company invests.  High-risk investments (junk bonds and defaulted mortgages, for example) have caused the downfall of several large insurance companies such as Executive Life, First Capital Life, and Monarch Life, and a company’s exposure to such investments should be very limited.

• Moodys - Insurance Financial Strength Ratings can be found under the “Insurance” category.  

• Weiss - Weiss is the only major rating service that charges for its current ratings.  The cost is currently $7.95 per company and the only information you will receive for that price is the letter rating.  To purchase a rating, click on the “Ratings Online” button.  

As a good rule of thumb, only companies who have received one of the top two ratings from at least three independent rating companies should be considered.  For further information on the differences between these five services, in 1994, the US General Accounting Office issued a report entitled “Insurance Ratings: Comparison of Private Agency Ratings for Life/Health Insurers” which can be found on their website (www.gao.gov).

Other Important Research

In addition to third party ratings and basic financial data, there are a number of other websites that provide valuable information:

• Demutualization:  Many mutual insurance companies have chosen to convert to either a stock company or a mutual holding company.  This process can be extremely costly and, depending on the structure chosen, can be either a favorable experience for policyholders or quite disappointing.  For an detailed review of the various demutualization issues and to check whether the company you are researching is planning for or has completed this process, fee-only insurance consultant Glenn Daily’s website is an excellent resource. (www.glenndaily.com/mhc.htm)

• Pending Class Action Lawsuits:  The last ten years have witnessed numerous lawsuits against insurance companies, with settlements as high as a $1.2 billion.  In addition to the financial stress this places on the insurance companies involved, such suits may also give an indication of the company’s philosophy and marketing practices.  The Insure.com website offers an up-to-date summary of the major suits and settlements. (http://info.insure.com/lawsuits/) 

• Complaints Filed:  Insure.com also maintains data on the number of consumer complaints filed against each insurance company in each state.  Compare this data with the primary states where the company does business as outlined in the Fitch report above.  If your company sells most of their policies in Colorado and Texas, for example, and in those two states, the carrier had an unusually high number of complaints, this may be a red flag that business practices are problematic. (http://info.insure.com/complaints/)

Be choosy.  There are more than 1,600 life insurance companies in the US, and there’s no rule that says you have to limit yourself to those carriers recommended by your insurance agent.  If he brings you choices that don’t match your long-term insurance objectives, tell him what you do want, or try another agent. 

Questions? Comments? Criticisms?
Email : jj@DeathAndTaxes.com