The Rating Game: When A+ Equals C

If you had called A. M. Best Co. on July 1 and asked for a rating on Mutual Benefit Life Insurance Co., you would have been soothed by the answer: A+. One week later, the venerable agency seemed only slightly less upbeat, rating the insurer "contingent A"--Best's designation for sound companies with temporary troubles. But on July 16, there was no rating at all. Mutual Benefit had been seized by New Jersey's regulators.

What if you had rung up rival rater Weiss Research Inc.? The self-styled consumer-advocate agency showed a C ("fair") rating for Mutual Benefit as early as March, downgrading it to D+ ("weak") in June, and to E ("very weak") on July 12.

BETWEEN THE LINES. But don't confuse hindsight with 20-20 vision. Before you conclude that Best didn't live up to its name, remember that ratings are subjective. "These are opinions, not guarantees," says insurance industry watchdog Joseph Belth. The major agencies--Best, Standard & Poor's, Moody's, Duff & Phelps, and Weiss--take different approaches to the data they use. And their ratings have nuances that aren't immediately apparent. To help you sort out the symbols, BUSINESS WEEK has grouped them into seven levels and used these levels to create a composite index (tables).

The 91-year-old Best is the most exhaustive of the raters, covering 3,800 companies. Its evaluations are based both on quantitative analyses of profitability, leverage, and liquidity and on qualitative study of companies' risk diversification, asset quality, and management. Best works closely with the insurers and takes a long-term view of their relationships with policyholders. It assumes the companies will survive several economic cycles over 20 years or more. That's one reason Best has a higher concentration of "superior" ratings than its competitors.

At the other end of the spectrum is Weiss, which started rating insurers in 1989. Weiss uses only public data--the statutory information insurers supply to state commissions--to compile its ratings, which follow a report-card format from A to F. Weiss examines whether a company's balance sheet would hold up in a severe recession, assuming that at least one is bound to occur during the life of a policy. So companies get far fewer "superior" ratings from Weiss than from Best.

In between these two extremes are the three specialists in hard-core financial analysis. S&P, Moody's, and Duff & Phelps have almost identical rating scales, whose similarity to bond grades reflects their history as raters of debt issues and preferred stocks. They work in cooperation with the companies they cover, and their approaches are similar--though the three by no means move in lockstep. Thus, looking at their ratings may give the clearest comparison of opinion.

CLAMORING. Armed with this background, you're ready for the rating wars. Once you realize that a contingent A from Best is four notches below its highest mark, you'll see that the benign-sounding rating for Mutual Benefit was actually a red flag. And when you remember that the plethora of C's in Weiss's list describes a worst-case scenario, you can mentally adjust for the fact that the economy is emerging, however slowly, from recession.

Predictably, both Best and Weiss have come under fire as a result of the insurers' troubles: Best for being too kind and too slow, and Weiss for fueling policyholder panic. In fact, there's almost as much drama going on among the raters as there is among the insurers themselves. As consumers clamor for information about their insurers, it's likely that all five raters will fine-tune their methodologies--and that the consumer will be the winner. Until then, get as many opinions as you can.

      Insurer      A.M   Moody's   &        Duff        Weiss   BW composite
                    Best          Poor's   & Phelps               index
      PRUDENTIAL     A+      Aaa   AAA   NR superscript    B      1.5
      METROPOLITAN   A+      Aaa   AAA   AAA                A-     1.2
      AETNA          A+      Aaa   AA+   NR                 C+     1.7
      EQUITABLE      A-      A3    A     A                  D      3.2
      TEACHERS INS.  A+      Aaa   AAA   NR                 B-     1.5
      NEW YORK LIFE  A+      Aaa   AAA   NR                 A      1.0
      CONNECTICUT    A+      Aaa   AAA   NR                 C+     1.5
      JOHN HANCOCK   A+      Aa2   AAA   NR                 C      2.0
      TRAVELERS      A+(c)   A2    A+    AA-                C      2.8
      NORTHWESTERN   A+      Aaa   AAA   AA                 A      1.2
      PRINCIPAL      A+      Aa1   AAA   NR                 B-     1.7
      MASSACHUSETTS  A+      Aa1   AAA   NR                 B      1.7
      LINCOLN        A+      Aa3   AA+   AAA                B+     1.6
      MUTUAL OF      A+(c)   Baa1  AA-   AA-                C      2.8
       NEW YORK                                                               
      NEW ENGLAND    A+(c)   Aa3   AA+   AA                 C-     2.4
      (1) Ranked by 1990 assets
      (2) NR = Not rated
      (3) (c) = Best's `contingency' rating, indicating it sees a temporary decline 
      in profitability or liquidity
      (4) Average based on assigned value; the top rating is 1.0
      Description        A.M.       S&P/   Moody's   Weiss   Assigned
                         Best       D&P                       value*
      Superior.           A+        AAA     Aaa        A+        1
      Negligible risk
      Excellent.          A+(c)     AA+     Aa1        A
      Small, slightly     A, A(c)   AA      Aa2        A-        2
      variable risk       A-        AA-     Aa3        B+
      Good. High          A-(c)     A+      A1         B
      claims-paying       B+        A       A2         B-        3
      ability for now     B+(c)     A-      A3         C+
      Adequate,but        B         BBB+    Baa1       C
      less protection     B(c)      BBB     Baa2       C-        4
      against risk        B-        BBB-    Baa3       D+
      Below average       B-(c)     BB+     Ba1        D
      quality, higher     C+        BB      Ba2        D-         5
      risk factor         C+(c)     BB-     Ba3        E+
      Financially         C         B+      B1         E
      weak, high          C(c)      B       B2         E-         6
      risk factor         C-        B-      B3
      Nonviable, or                 CCC     Caa        F          7
      about to be                   CC, D   Ca, C
      * Used to calculate BW composite index
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