5% of Insurers in Poor Shape, S&P; Reports
Underscoring the insurance industry’s deteriorating condition, Standard & Poor’s said Monday that 489 insurance companies, which wrote $18.3 billion in business during 1989, are in “below average” financial health.
These companies provide only “limited security” to policyholders, said Standard & Poor’s, one of the nation’s biggest rating services, in a newly published “solvency review.”
Another 430 life insurance companies, which wrote $34 billion in business during 1989, received conditional “average” ratings. And about 350 property and casualty insurers, which wrote $39 billion in business during 1989, also were ranked as conditional average risks, S&P; said.
“If your insurer is in the lowest category, you really want to check to find some mitigating circumstance--some excuse--to use this company,” said Steven J. Dreyer, an S&P; vice president. “Companies that are rated BB (average) are a little stronger, but they’re essentially sending mixed signals. You would want to make sure that they are going to be around when you need them.”
The current edition of the Insurer Solvency Review ranks insurers based on their 1989 financial results as filed with insurance regulators, S&P; said. The company expects to come out with a second edition of its solvency review this summer, which will rank companies based on more current year-end 1990 financial results. That analysis is likely to show that things have gotten worse, Dreyer said.
“We do see a deterioration, in general, in the industry’s results,” he added. “The property and casualty industry is suffering with continued competition, shortfalls in reserves and sometimes shaky reinsurance deals. Life and health companies often have tenuous investment portfolios and are dealing with squeezed (profit) margins.”
S&P; maintains, however, that the overall industry is reasonably sound. Only about 5% of the companies are seriously sick, it said.
Companies with secure ratings of their claims-paying ability account for roughly two-thirds of the nation’s insurers, S&P; said. Moreover, an additional 314 companies, which account for about 20% of the market, got high enough conditional ratings that S&P; thinks they would probably would be rated “secure” if they provided S&P; with the data--and the fee--required to be rated on claims-paying ability.
In its report, S&P; lists both ratings on companies’ claims-paying ability and “conditional” ratings on solvency. The 450 companies that are rated on their claims-paying ability supply S&P; with non-published information, and they pay the rating service a fee ranging between $15,000 and $30,000, Dreyer said.
The 1,600 conditional ratings were compiled by going through public filings made with insurance regulators, he noted. Company interviews were not conducted.
Notably also, companies that paid the fee and received ratings on their claims-paying ability are generally rated as healthier than those that didn’t. Only two of the 450 so-called CPA companies--those rated on claims-paying ability--ranked in the “average” and below-average categories, Dreyer said.
Dreyer maintains that is because companies that find their financial condition deteriorating often stop providing S&P; with information and stop paying fees to get rated.
Still, analysts note that S&P; is among the most optimistic of rating services.
Until January, 1990, Executive Life Insurance Co., which was recently seized by regulators, received a AAA rating--reflecting “superior” claims-paying ability. The company is now one of the two firms rated below average on claims-paying ability.
Other rating services, including Weiss Research in West Palm Beach, Fla., have been less optimistic about Executive Life for some time, primarily because of the company’s heavy reliance on investments in junk bonds.
But Dreyer maintains that Executive’s case is unusual.
“Certainly, Executive Life illustrates what can happen when financial vulnerability is combined with a confidence crisis, which is really what happened in this case,” Dreyer said.
“Even when we rated them AAA, we knew they had a vulnerability to junk bonds. What we did not anticipate was the complete collapse of the junk bond market,” Dreyer said.
Moreover, S&P; has lowered Executive Life’s ratings several times since the company made it clear that the collapse of the junk bond market would leave it with billion-dollar losses, he noted.
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