Moody’s, along with A.M. Best, Fitch and Standard & Poor’s, are the big four when it comes to the Nationally Recognized Statistical Rating Organizations (NRSRO) by the U.S. Securities and Exchange Commission.
Each entity provides a comprehensive analysis of the financial health and creditworthiness of businesses including insurance companies you may be considering.
Who Is Moody’s?
Like many of the major players, Moody’s beginnings go back to the early 20th century.
It began as a reference and source of statistical data related to stocks and bonds published in its “Moody’s Manual.” Today, it is one of the main bond rating agencies that assess an issuer’s financial strength. Their ratings are part of the basis for determining the credit rating to a bond.
Investors rely on the financial analyses of these agencies to determine their risk and the financial security of the businesses. For the individual ratings and assessments by NRSROs can help you determine your own risk when it comes to purchasing insurance. The ratings different life insurance companies receive are not unlike a report card of their creditworthiness with claims.
It’s an excellent way for you to get an expert opinion on whether a company is a safe risk for you. Investing in life insurance involves trust that an insurer will be there when you or your family need them the most. It’s a decision you can’t take lightly.
How Moody’s Conducts Its Research
Several factors go into a rating for a company simply because many things can influence its status.
They consider basic information such as the company structure and its management style. The ideal situation is a stable company which conveys a sense of security. This is probably one the most important considerations for you as a consumer. But it’s only part of the picture.
An insurance company’s history of paid claims is also essential especially since it could impinge on an insurer’s ability to meet all its financial obligations. Another vital factor is strong financial reserves. If you’re purchasing life insurance, for example, you want a company that has a proven track record of financial security with the ability to endure fluctuating market conditions.
With insurance companies, it’s also crucial to view an insurer’s performance compared to its competitors in the marketplace. With this information in hand, Moody’s will then issue a rating using an alphabetical scale going from AAA to C with numerical modifiers for long-term ratings. There are a lot of nuances to these ratings despite the simplicity of its system.
Here is the most commonly used chart of Moody’s ratings and their descriptions for each:
|Aaa||Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.|
|Aa||Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.|
|A||Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.|
|Baa||Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.|
|Ba||Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.|
|B||Obligations rated B are considered speculative and are subject to high credit risk.|
|Caa||Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.|
|Ca||Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.|
|C||Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.|
Each rating is a measure of issuer quality and credit risk, with Aaa being the highest grade possible. There are 10 ratings considered part of the investment grade and 11 in speculative grade. Those two designations alone might be enough for you to consider. Remember each NRSRO has its own methodology for determining its long-term credit rating.
Moody’s also issues short-term ratings, albeit, less complex than its long-term system. There are five ranks within the investment grade and a single on in the speculative grade. They go from Prime 1 through Prime 3. Their main focus is on a company’s ability to pay short-term debt obligations which go from best to acceptable.
The speculative grade only includes Not Prime. Here’s a quick table:
|P-1||P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.|
|P-2||P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.|
|P-3||P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.|
|NP||Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.|
Using Moody’s Ratings System
Independent financial analyses are only one tool you can use to determine the best insurance company for you. While the Big Three often come to similar conclusions, they are not the end-all-be-all source of information. All three NRSROs urge the same caution when it comes to making a financial decision. With life insurance, there are also several other factors to consider.
Generally, the method of how you can immediately evaluate a company, rather than going through the entire analysis, is to take a glance at the score, or rating, the carrier received. At Moody’s, here is what the grade scale looks like, and what each rating means
Moody’s offers one way to obtain information about the creditworthiness of potential insurance companies for you to consider. It reviews data that can help assess a given company’s credit risk and its ability to remain stable during uncertain economic times. It is one of the global leaders with a presence in 36 countries with decades of experience in financial analysis.