Who do you trust when you need to make a decision on where to place your business when you’re buying insurance?
While every insurance company will be quick to tell you every single positive thing about their company and products (likely failing to mention their shortcomings), using a third party independent credit rating agency like Moody’s will be much more beneficial to you in the long run.
To say life insurance is a major purchase is an understatement.
Choosing a life insurance company should come with thoughtful research that goes beyond watching a quick commercial or skimming a company’s website.
While those are good starting points, nothing compares to the invaluable information provided by Moody’s and similar credit rating companies.
In this guide, we’ll give you a quick overview of what Moody’s does, why it matters, and how you can use the information Moody’s provides to make the right call when it comes to purchasing life insurance.
Moody’s Corporation: A Quick History
Moody’s Corporation has been providing investors and insurance shoppers alike with quality company ratings for decades, and they’ve been around even longer than that.
First things first, Moody’s Corporation was founded by John Moody.
If you are unfamiliar with Mr. Moody’s legacy, he is credited as the inventor of bond credit ratings, having initiated the concept of rating a company (or a country) on its probability of repaying its debts.
Moody began releasing these credit ratings in 1900 via his two publishing companies, with an initial guide entitled Moody’s Manual of Industrial and Miscellaneous Securities.
That guide was followed by two more, assigning bond credit assessments to railroads, corporations, and other investment sources.
Moody’s investment guides were widely acclaimed within a few years of their publication, and 9 years after the first manual was published, Moody’s Corporation was founded.
The company was acquired by Dun and Bradstreet in the 1960’s, but after three decades of remarkable success, Moody’s Investors Service was launched as a publicly traded company.
While we’re referencing Moody’s Corporation throughout this post, the main focus is on Moody’s Investors Service, the branch of the corporation which doles out the credit ratings.
Understanding Moody’s Corporation And What They Do
Even if you selected the top companies by brand popularity, are you sure you’re getting the best deal with a reputable company?
Moody’s can answer that question because they compile data on most major insurance companies in the U.S. and rate them based on financial strength, their ability to stay current on their bills, and their likelihood to provide both stable and sound products now and in the future.
They take this data and attempt to simplify the company profile into a single grade, or rating, which is easy to compare from one insurance company or financial institution to the next.
How Moody’s Ranks Companies
Moody’s is technically a credit rating agency, comprised of the Moody’s Investors Service and the Moody’s Analytics divisions.
They evaluate both national and global markets, the companies who make up the industries, and a long list of benchmarks which help to give a more clear indication of a company’s current and future success.
They then break it down into something a consumer can understand at a basic level.
All the data they take into consideration creates a nice output each consumer can use to make a more informed decision.
Here’s what their rating table looks like:
|Aaa||Exceptional credit, highest rating, lowest risk.|
|Aa||Excellent credit, very low risk.|
|A||Good credit, low risk.|
|Baa||Moderate credit, possible speculative concerns.|
|Ba||Substantial risk, speculative.|
|B||High risk, speculative.|
|Caa||In poor standing, very high risk.|
|Ca||In or near default, highly speculative.|
|C||In default, lowest rating, highest risk.|
Seeing an insurance company’s overall risk profile in an easy-to-read format like this can help when picking between two or more companies who seem, otherwise, to be very similar.
A company can earn higher ratings by have a well-structured budget and balance sheet, a good cash flow statement, high regard to local and national regulation, large reserves and a strong and consistent business model with a successful track record of both business and management.
Take note of the differences in what each rating means.
Although it is a familiar alphabetically-styled order, it is not the same as standard education grades where a “C” is average, a “B” is above average, and an “A” is top notch.
Even a company who has been awarded a “Baa” does have something in its financial statements which point to speculation, whether it be its current assets, investment portfolio, or other factors.
Interestingly, Moody’s works differently than the other two “Big Three” credit agencies in the way it assigns ratings.
Whereas Fitch and S&P assess a company based on how likely it is to default, Moody’s seeks to measure how bad the losses will be if the company defaults.
Other Areas of Moody’s Corporation
Moody’s Investor Services is the one responsible for issuing the individual grades or ratings for each carrier, but there is more to Moody’s services than simply providing credit ratings for consumers and investors.
In order to effectively score a company, Moody’s uses intensive data that looks at a wide range of considerations.
The Moody’s Analytics side of the house focuses more on the broad markets, industries, and overconfidence in the markets.
They oversee tens of thousands of companies, both local and worldwide and utilize proprietary systems and metrics to award the ratings they do.
Moody’s Analytics also provides professionals with financial training opportunities, software, and risk management tools.
In addition to Moody’s Analytics and Moody’s Investor Services, the corporation also houses the Moody’s Foundation and Moody’s Research Labs.
The Moody’s Foundation is a philanthropic endeavor that grants funds to nonprofits focused on education, math, and finance.
They also encourage students to use critical thinking skills and scientific analysis to solve realistic problems through their annual Mega Math Challenge.
Moody’s Research Labs
Lastly, Moody’s Corporation plays a role in wide scale economic discussions through its Research Labs initiatives.
This branch of the corporation is geared towards, as its name suggests, researching and creating new models for assessing and confronting financial risk.
Each arm of Moody’s Corporation works to build its credibility, confirming its place as a leading authoritative voice in financial management and the global economy.
Other Credit Rating Agencies To Consider
Alongside Moody’s, there are three other major credit rating agencies who we, and the Comdex, consider for major insurance companies.
A company can elect to be reviewed by one, some, or all four of these rating agencies, and ratings can fluctuate based on several factors at any time.
The best way to ensure you get the most accurate snapshot of the insurance provider you’re considering partnering with is to check the scores provided by all four of the leading rating agencies.
You can also look to the Comdex, which uses the scores from the agencies above to place companies into a percentile on a 100 point scale.
As with any other rating agency, Moody’s does not claim their ratings to be the one and only factor to consider when making a purchase, but they have a proven history of identifying the major gaps which tend to lead insolvent companies down the road to default.
Always take into consideration every possible factor when choosing any insurer, including its history, its mergers or acquisitions, consumer reviews and even differences in products to make sure it aligns with your personal expectations.