AM Best’s Edward Kohlberg breaks down how financial-strength ratings for life insurers and annuity providers work, why they matter for anyone saving for retirement, and what trends are shaping the industry today. Topics covered include the rating process and cadence, the rise of annuities and new market entrants, growing use of private credit in insurers’ portfolios, and how firms stress-test for interest-rate and economic changes. If you’re choosing an insurer for life insurance or an annuity, or advising clients, these insights explain what to watch for when assessing a company’s ability to pay claims long-term.
Jeffrey Snyder, Broadcast Retirement Network
Well, it’s great to see you. Thanks for joining us this morning.
Of course, good to see you. Thank you. It’s a pleasure to see you.
I hope your almost summer is going well. I know it’s warming up on the East Coast. I hope things are staying relatively cool in the New York area.
The last time we had you on, we talked about insurance in the insurance industry and credit ratings. It’s a very important discussion. I want to continue that, but I thought for the audience’s benefit, and the audience is really a myriad of different types of people, from consumers to professionals.
Let’s go back and take a step back. I don’t want to start with, why are organizations like AMS, your ratings organizations, you’re one of several, why are they so important in what they do?
Edward Kohlberg, AM Best
Sure. Good question. We do financial strength ratings on insurance companies, and I focus on the life and annuity sector.
I’m a ratings analyst in the ratings department. Yeah, it’s important, especially when you think about, I’m going to focus on the life and annuity products. Given the long-term nature of those products, the policyholder might want to seek peace of mind that the company that they’re buying a policy with will be there for the foreseeable future.
You would want to pick an insurance company that you think would be there during turbulent economic downturns, and go through economic cycles, and be able to be there to pay a claim for a life insurance policy. That would be the death benefit. And I think it’s become even more important when you think how the industry, or life annuity industry, has really been focusing more on the annuity side, on retirement products.
You worked hard, and you got all your retirement funds, and you want to put it to an annuity, you want to have trust that that company is in good hands with the company that you choose. So, our ratings at AMBESS focus on the financial strength of these organizations, looking at things such as balance sheet strength, operating performance, business profile, and ERM, risk management. Risk management’s very important when you think about the financial strength of an organization.
Jeffrey Snyder, Broadcast Retirement Network
So, let’s talk about the process, and the frequency. So, how does it typically work? I know you’re sitting in your office in New Jersey.
Do you and the team go on site? How frequently do you do that? How often do the ratings potentially get reviewed and could change?
Edward Kohlberg, AM Best
Oh, excellent question. So, at a minimum, we would do it every 12 to 13 months. We would do a formal rating on the organizations that are assigned to us, the analytical team.
Yeah, sometimes we’ll go out, and meet with them in person, and sometimes they’ll come out to our office to meet in person. So, that’s at a minimum, but we do constant surveillance through the year, right? Where we get the quarterly statements from the organizations.
We keep current on news and events that’s going on. It’s an interactive process where if there’s something going on with the organization, during the year, they’ll reach out to us, or we’ll reach out to them, and get an update on it. If it warrants an event-driven rating, we’ll bring the company in front of the rating committee to take a look at that organization, even before the 12 to 13 month minimum point.
That’s if events transpire, if there’s an acquisition, or just looking at the accounting numbers, if there’s something that raised some concern, we will take it to rating committee. Also, we also do, at a minimum, also a six month review. We’re six months out from doing the full review.
We’ll do an internal review on our own to look at the financial statement. So it’s a constant surveillance, and constant interactive process.
Jeffrey Snyder, Broadcast Retirement Network
You’re more like a detective.
Edward Kohlberg, AM Best
Yes.
Jeffrey Snyder, Broadcast Retirement Network
Not that it’s not transparent, but I mean, you have to be looking, and peeling back the onion, and every company, I would imagine, is different. I mean, there are standards, right? There are financial standards, gap standards, but every organization is unique and different.
Edward Kohlberg, AM Best
Oh, definitely. And if you have intellectual curiosity, you perform very well at AMBEST, because that’s a key initiative, and a key quality to have. But our expertise within the insurance industry at AMBEST, and the resources we have to work as a team, really help us to do that detective work, as you say.
Jeffrey Snyder, Broadcast Retirement Network
You mentioned retirement products. I want to get to your analysis in the insurance industry in a second, but how do organizations, how do fiduciaries, how do people generally utilize the research, and the information that a firm like AMBEST puts out? How would they leverage it?
I mean, I know you’re on your side of the fence, but I’m sure you have some had interactions with fiduciaries, and people that are advising clients. How do they typically use the information that you have created, and provide to the industry?
Edward Kohlberg, AM Best
Yeah, well, I’m going to go back a few years. We used to put out this book. It was an encyclopedia with all the ratings of all of our companies for PNC.
We had a book, and for life and health, we had a book. So yeah, I think a lot of these fiduciaries would have that book as a reference. Now, we have the internet, and our website, which gives access to these fiduciaries to look up our ratings, and utilize them as distributors, or using them as advisors, when advising their clients, and policyholders on what company to use.
But we are seeing a growth on the direct side, right? Where maybe a company is using the internet to market directly to the policyholder, and you could see in a case like that why a rating on an insurance company is very important, so it’s not just a fly-by-night company. There could be trust within the organization that they choose to use.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and then there are a lot of insurers in the United States that are almost 100 years, or they could be 100 years or more older. So they’ve been in the business for a lot of different periods. But then, as you said, there are younger companies that have different products and services to sell, and they equally have to get the scrutiny, or the evaluation that AMBESS does.
Let’s get to the crux of the matter, though. Let’s talk about the insurance industry. You’ve been very generous with your time this morning.
What stands out to you? So what are some of the things that you’re looking at when it comes specifically to retirement products, like annuities, I’m thinking life insurance, long-term care, things like that. What stands out in the insurance industry right now to you, or to AMBESS, in general?
Edward Kohlberg, AM Best
Yeah, there’s certainly been the growth in the annuity product. That’s been well-documented over the last few years. It’s still growing, but maybe not at the same pace.
And we’ve seen a lot of new companies and organizations coming into the market, some owned by asset managers, some owned by private equity, and it’s become very competitive space. Clearly there is enough business to go around for these new organizations. So from our end, if we look at the holistic ratings, and we did an analysis going back a few decades of the weighted average rating for the life industry back a few decades to today, the average credit rating has gone down, right?
And so we’re thinking, well, what is that? It is these new entrants, right, that sometimes start at a low rating. And also because the annuity market has really grown, and it’s not really the life and annuity industry.
Now it’s the annuity and life industry where the annuity reserves have taken over as far as total size for the industry against just typical life mortality business. So on a weighted basis, some of those ratings do tend to be lower than a company that’s just focused on mortality and been around for a hundred years. So that’s slightly, you know, still very strong rating for the industry as a whole, but just slight migration down in total weighted average credit rating.
So those are some of the things we’re seeing. You know, it’s the annuity growth, it’s focused on the asset intensive business and a focus on retirement products.
Jeffrey Snyder, Broadcast Retirement Network
Thank you, Jason. I mean, I think I read a study this morning, 10,000 people in the United States turn 65 every day. I don’t know, I guess I haven’t done the math on that, but that’s what I read.
So it’s gotta be right. I read it in the news. But my point is, is that more and more people, the demand is there, theoretically.
You could have all these millions of people that are clamoring for these products. You wanna make sure that these companies are properly capitalized for lack of a better term.
Edward Kohlberg, AM Best
Right, capitalized, and that they have a strong risk management, you know, that they’re profitable and, you know, the prudent investment management as well.
Jeffrey Snyder, Broadcast Retirement Network
Last time we had you on, I think we talked about some of the asset classes that maybe stood out. So insurers, I guess, to take a step back, insurers typically have a general account that they use to manage their liabilities, right? That they do that, they have different investments.
But I believe that there was an asset class or two that really stuck out last time. I wonder if we could talk a little bit about that, what that asset class is and how are things going with that asset class based on AMS analysis?
Edward Kohlberg, AM Best
Sure, yeah, private credit usage in the industry has grown. And, you know, since we last talked, I don’t think much has changed. It continues to be utilized through the industry to support new business.
You know, they do have a more favorable yield on a comparison basis to an equally rated corporate public security. You know, and it’s not one size fits all, right? Every company has kind of a different niche and expertise within private credit.
It’s a broad term and a lot of different type of investments fit that. ABSs, CLOs, even, you know, some companies have the ability to write and underwrite private loans, you know, through their own investment management or through their parent organization. We’re seeing use of funds, private funds, and, you know, that takes extra work sometimes to really understand what truly are in those funds.
And, you know, it’s well-documented, some scrutiny that has come on the timeliness of ratings on some of those and, you know, the accuracy, you know, always needs to be looked at as well. And there’s concern over transparency of certain asset classes that fit into private, you know, and, of course, the liquidity isn’t as robust sometimes with a private investment as there is no readily tradable market such as, you know, a public security. So, yeah, no, those things continue to be in play.
You know, they’re there and the size is quite large. So, you know, they’re not going away anytime soon.
Jeffrey Snyder, Broadcast Retirement Network
It doesn’t seem to, it doesn’t, you know, just because they’re private, I guess, doesn’t mean it’s quote-unquote bad. It just means that it requires additional, because private to me, and you correct me if I’m wrong, but private means that in a public market, their information is very open. Anybody can get the information.
In a more private context, you actually, it’s not available openly to the public. It has to be available upon request and there’s all sorts of different components to that. But it seems like this trend will continue.
And I guess I can see, you know, neither of us are investment managers, but I could see the, if it’s performing better or possibly could perform better, you know, I could see why people are investing in it. Let me, as we close out this morning’s conversation, let me just ask you maybe for the remainder of the year, here we are in June, what are you looking at? I mean, will you, you know, for the next six months as you round out the year and how much does what the Fed does, does that play any role in your analysis, meaning the Federal Reserve Bank of America, does that play a role in any type of your analysis?
Edward Kohlberg, AM Best
Sure, yeah. Should interest rates change or move, you know, companies have to be able to react to that. We like to see companies perform well through changing economic conditions that could be, you know, interest rate changes and other economic changes.
So, you know, we talk to companies about their stress testing and their results on how capitalized or how their performance will be over different interest rate scenarios. So, yeah, no, we try to be forward-looking with our ratings and, you know, it’s more of an art than a science, of course, forward-looking, because we’re not psychic, you know, but you could go off of. Do you have an eight ball?
No eight ball. I’m kidding. We can’t rate using an eight ball or, you know, we got to use our own insights that we have, but you kind of go off of historic, right?
What has historically occurred and then, you know, expectations for going forward and, you know, companies do provide us with their projections and their expectations for the year. And we look at those and see how companies perform against those.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I was just joshing. I don’t want to belittle any of the work that you guys are doing. And so it is really a critical part of financial services to make sure that people understand exactly what they’re invested in and it’s predictable and, well, not predictable, but that they’ll get something at the end of the day.
Yeah. but thank you again after paying all the years in premia. Ed, we’re going to have to leave it there.
Really great to see you again. Thanks for giving me an explanation. Hopefully the audience enjoyed it as well.
I look forward to having you back again very soon.
Edward Kohlberg, AM Best
Of course. Thank you.
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