Insurance Ratings: What Consumers and Policyholders Should Know
A.M. Best, a major insurance rating agency, affirmed Penn Mutual’s A+ ranking on March 8. The annual rating is a reflection of our mutuality and financial strength, and we are proud to have achieved a ranking of A or higher for the past 89 years.
While the A.M. Best announcement is exciting news internally, what does this mean for our policyholders and everyday consumers? Ratings should be a significant factor for a consumer’s buying decision, and here’s why.
Consumers look to life insurance and annuities as an important part of their overall financial plan. These products are really promises – promises to provide protection, give greater financial flexibility, and allow for a safe retirement. What rating agencies provide is an independent view of the future ability of an insurance company to make good on those promises. Ratings agencies take such factors as capital strength, business strategy, and distribution relationships into account in their determination of our future claims-paying ability. They also take structure into account, so rating agencies consider our long-term focus as a mutual insurer in our ratings.
Advisers also look at ratings when they choose to do business with a new life insurance company. They entrust us with their clients and don’t take that responsibility lightly, so they too look to ratings agencies as a way to verify the quality of our products and company stature.
How do ratings agencies work?
In our industry, there are a handful of major agencies – Moody’s, S&P, and A.M. Best to name a few, all of which take a slightly different perspective when evaluating the strength of a company. However, they do tend to boil down to a few similar factors:
- Capital strength. Each of the ratings agencies views capital a bit differently ranging from a statutory view (which is how a regulator views Penn Mutual’s balance sheet) to proprietary models. Over the last few years, we have internally built internal versions of each of the ratings agencies’ models in order to better understand their perspective and anticipate any ratings movement.
- Business profile. This looks at the overall business plan, the strength of the strategy, portfolio of products and the structure of distribution. It is in this section that rating agencies see the strength of having both career and independent advisers as a distinct advantage.
- Governance and risk management practices. This category includes how the company functions internally to raise concerns, manage risk and set risk limits.
In terms of the process, the ratings agencies go through and where we look to build relationships with them there are several places where we are able to tell them our story. First, they review our financial reports (GAAP and Statutory statements) and ask us a series of questions through a survey process once a year. We also make ourselves available for quarterly calls with each of the agencies where our COO, Dave O’Malley, CFO, Sue Deakins and I give them an update on how our results have been, what changes we might be making, and what we are seeing in the marketplace. This is often a good place for us to get external information on industry trends such as how our lapse rates compare to the industry broadly, how are others managing a changing regulatory landscape or how is the industry responding to financial market movements. Finally, we invite each of the rating agencies to Horsham on an annual basis to tell them the Penn Mutual story – who we are, what we do, and how we do it. Many of these materials would be familiar to all of us as they are often taken from the annual business plan and other associate – wide venues.
Of importance to note is that Penn Mutual, and other life insurance companies, opt to partner with these ratings agencies to be reviewed. From our perspective, we see being analyzed and reviewed as an independent proof point for advisers, prospective consumers, and current policyholders to reinforce our structure, and measure our ability to make good on promises.
An insurer’s financial strength rating represents an opinion by the issuing agency regarding the ability of an insurance company to meet its financial obligations to its policyholders and contract holders. A rating is an opinion of the rating agency only, and not a statement of fact or recommendation to purchase, sell or hold any security, policy or contract. These ratings do not imply approval of our products and do not reflect any indication of their performance. For more information about a particular rating or rating agency, please visit the website of the relevant agency.