How To Determine The Right Company

1. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care • Process to research insurance companies • Assessment of the company’s rating by the major rating services • Evaluation of general characteristics and financial information • Review of recent trends for • Profitability • Leverage • Liquidity

2. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Company rating services • A.M. Best Company • Rating companies for 85 years • Low fees • Best Insurance review • One-year assessment of company’s financial situation • Provide opinions • Concerning companies relative financial strength • Company’s ability to meet it’s contractual obligations

3. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Company rating services (cont'd) • A.M. Best Company (cont'd) • Letter ratings • A++ to F • Additional modifiers • (g) – Group rating • (p) – Pooled rating • (r) – Reinsured rating • (u) – Under review • Not Rated designations • NR-1 – Insufficient data • NR-2 – Insufficient size or operating experience • NR-3 – Rating procedure is inapplicable • NR-4 – Company request • NR-5- Not formally followed

4. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Company rating services (cont'd) • A.M. Best Company (cont'd) • Financial planers should favor companies that have received at least an A+ rating for a number of years • Financial size rankings • FSC1 through FSC XV • Based on capital, surplus and conditional reserve fund • Moody’s • Assigns financial strength ratings • Aaa to C • Substantial fee • Limited number of carriers agree to be rated

5. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Company rating services (cont'd) • Fitch • Rates the claim paying abilities • AAA to D • Substantial fee • Standard & Poor’s • Rates the claims paying abilities • AAA to R • Substantial fee • Quality Solvency Rating • Mechanical rating system • Based on purely public information • From financial statements filed with the state regulators

6. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Company rating services (cont'd) • Standard & Poor’s (cont'd) • Quality Solvency Rating (cont'd) • BBBq – Above average • BBq – Average • Bq – Below average • Weiss research • Relative newcomer to rating services • Proprietary rating system • Dependant on publicly available information • Ratings more severe than those of the other rating services • A through F

7. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist • Company size and age • Large well established companies are likely to weather adverse trends more successfully than smaller and newer, less well –established companies • Company financial information • Percentage of premium that is individual life premium • Company could place more emphasis on other lines of business at the expense of the life insurance policyholders • Average policy size • Larger polices lapse less frequently than larger policies • Average policy size and company size are not related

8. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Quality of investment assets (cont'd) • Bonds, mortgages, real estate and policy loans • Carriers with financial difficulties • Large percentage of junk bonds • Large percentage of non-performing real estate or mortgages • Assets are listed by category and investment grade • Bond maturities • Shorter average maturities are considered less risky than longer maturities • Investment yields • Return on general portfolio principal source for • Dividends for participating policies • Interest credited to interest-sensitive policies

9. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Separate accounts • Variable life, variable annuity or variable universal life • By law, assets kept in separate account • Percentage of assets held in these accounts indicate companies view of the importance of these products. • Planners should assess the quality of these assets as they do the other assets • Liabilities and payments to surplus indicate charges applied against the funds • Compare separate account net investment income against those of competitors

10. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Company history management and operations • When was company founded? • Stock or mutual company? • Subsidiary of another company? • Recent changes in management? • Above-average growth? • Stability of growth? • How are products are distributed and what is the size of the field force? • How does it’s size compare industry wide? • Approved for business in the state of New York? • Companies most important product line • Proportion of business for each line

11. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Operating ratios • Lapse ratio • How many policies are lapsing annually • Look for lapse ratios less than 11% • Greater lapse ratio usually means higher than average expenses for policyholders • All else being equal, better to buy from companies with larger average policies • Operating comments • Compare net yield with the industry wide average • Reasons why it is higher or lower than the industry average • Reserves • Set asides to pay promised benefits

12. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Operating comments (cont'd) • Statutory Reserves • Amount that together with future net premiums and interest will be sufficient to pay future claims • Measures of expenses • Ratio of total expenses to total insurance in force • Comparing insurers who are almost exclusively life insurers • No weight to annuities , health insurance, disability and accidental death benefits • No allowance for difference between first year and renewal expenses • No allowance for differences of book of business by age or plan

13. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Measures of expenses (cont'd) • Ratio of total expenses to premiums received • Gives some weight to annuities, health insurance, disability policies, etc • More appropriate for companies with broader lines of business • Ratio of total expenses to total income • Broadest overall measure • Includes weighting for supplemental contracts • Mortality Experience • Company that has tough standards desirable • Future favorable mortality experience translates to possible higher dividends or interest credited to cash values • Lower lapse ratios

14. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Dividends • Compare projected performance against that of the actual experience • Business trends • New business issued • Management plans for new lines of business • Changes in amounts of insurance inforce • Look for declining trends in expenses • Trends • Profitability • Return on equity

15. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Trends (cont'd) • Change in capital and surplus • Measure of net worth • Excess of assets over liabilities • Greater surplus equals less risk of insolvency • MSVR • Mandatory Securities Valuation Reserve • Reserve for losses on securities held in the general portfolio • Leverage • Change in net premiums written • Measures whether a companies obligations are growing at a rate that may exceed it’s ability to handle them

16. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Life insurance company due care checklist (cont'd) • Trends (cont'd) • Insurance exposure to capital and surplus • Measure of mortality exposure or mortality leverage • How much adverse mortality experience the company can handle • Liquidity • Meeting current and future obligations • Affiliated investments to capital and surplus • Applies when company is part of an affiliated group of companies • Considers the investments of all affiliated companies and compares it to the consolidated capital and surplus

17. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Mutual Companies Versus Stock Companies • Mutual company • Corporation with no shareholders • Policyholders are members of the corporation • Membership rights • Right to the dividends declared by the board • Right to participate in the corporate governance • Election of directors • Right to receive any remaining value if the company is liquidated • Right to expect the corporation will be run for the benefit of it’s members • Right to bring legal action against the directors and officers for violating their fiduciary duties

18. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Mutual Companies Versus Stock Companies • Stock Company • Corporation with stockholders who may or may not be policyholders • Corporation run primarily for the benefit of the stockholders • Advantages and disadvantages Mutual (M) versus Stock(S) companies • M - No conflict of interest between shareholder and policyholders • M - Lower profit goals than stock companies • M - Management can take a longer term view • S – Greater flexibility to raise capital • M -Financial reporting less flexible because transitions listed on parents books • S – My be easier to provide other financial services through it’s subsidiaries • S - Management performance subject to higher level of scrutiny

19. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Reinsurance - why use it? • To insure against losses they may incur • Companies have limited amount of capital • Cap losses by they incur by purchasing reinsurance • The smaller the company, they more reinsurance they will buy • To seek the reinsurer’s underwriting and expertise • To seek help to enter or exit given lines of business or product lines • Company’s wanting to exit a line of business can reinsure the entire line • Company’s wanting to offer a new product or line can obtain the help of the reinsurer to underwrite and develop the product until the company develops it’s own expertise • To help a company manage it’s financial position • May increase the ceding company’s statutory earnings and surplus during the year paid

20. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Reinsurance (cont'd) • Proportional reinsurance • Reinsurer takes share of losses incurred • Categories of reinsurance arrangements • YRT • Ceding company transfers mortality risk but retains responsibility for establishing reserves • Coinsurance V • Transfers a proportionate share of all policy risks and cash flows • Relieves strain on surplus • Coinsurance with funds withheld • Ceding company keeps premiums normally paid to reinsurer • Reinsurer keeps allowanced normally paid • Limits cash flow between companies

21. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Reinsurance (cont'd) • Non-proportional reinsurance • Only pays if loss exceeds a certain amount • Risk is allocated by amount • Categories • Stop Loss • Covers ceding companies claims above a predetermined dollar amount • Catastrophe • Covers losses exceeding a specified amount or number of insured’s due to a single event (e.g., airplane crash, train wreck or natural disaster) • Excess of Loss • Reinsurance above a certain dollar amount for a particular claim

22. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Federal and State Laws and Regulation • Purpose of regulation • Maintain insurer’s financial solvency and soundness • Maintain fair treatment of current and prospective policyholders • Insurance carriers regulated by the individual states • Division of insurance • Investigate claims of unfair trade practices • Reviewing and approving policy forms used by insurance companies • Approving rates charged for various types of insurance • Ensure compliance with state laws that regulate insurance rates

23. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Federal and State Laws and Regulation • Insurance carriers regulated by the individual states (cont'd) • States assume primary responsibility for overseeing financial operations and management of companies incorporated in their states • National Association of Insurance Commissioners(NAIC) • Coordinates the regulatory processes of the states • Suggests model laws state legislatures can enact • Underwriting • Determines whether or not to issue a policy and at what price

24. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Underwriting (cont'd) • Factors used in determining offer • Age • Sex • Height and weight • Health history (including family) • Purpose of insurance • Marital status and number of children • Amount of insurance inforce and applied for • Occupation • Income • Credit history • Tobacco and alcohol use • Foreign travel • Hobbies

25. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Underwriting (cont'd) • Physical exam • Medical records • Blood and urine samples • Medical Information Bureau (MIB) • Classifying the risk • Impacts the price of the coverage • Preferred, standard, table rating (as examples) • One companies rating is not necessarily what another company would rate

26. How To Determine The Right Company Chapter 3 Tools & Techniques of Life Insurance Planning • Company service and fairness to policyholders • Service is difficult to quantify • Considerations • Turnaround time for requests for information, policy loans, application processing, death claims • Level of service provided by the agent • Do policyholders share equitably in the company’s favorable performance • Do policyholders of one class of policies share equitably as compared to other shareholders of other types of policies • Compare projected dividends against those actually paid