Capital is Crucial in Insurance; Here are the Top Companies that Made Our Cut

Adequate capital is the most important factor when it comes to analyzing any insurer. That’s because capital levels can indicate what might happen to a company if the going gets tough and policy holders demand to be paid.

When you, the policy holder, need the money — whether from a life, homeowner’s or any other insurer — you expect your insurer to pay up on time. Having its capital information could be very helpful in determining whether the company is okay, or whether you need to begin looking for a new provider.

Among the important indicators used in the analysis of an individual company are Weiss Ratings’ two risk-adjusted capital ratios. They are useful tools in determining exposure to investment, liquidity, and insurance risk in relation to the capital the company has to cover those risks.

1. The first Risk-Adjusted Capital Ratio (RACR#1) evaluates the company’s ability to withstand a moderate loss scenario. The second ratio (RACR#2) evaluates the company’s ability to withstand a severe loss scenario.

Specifically, these ratios are calculated from annual and quarterly data. They’re designed to answer the following question: For every dollar of capital that we feel would be needed to meet all obligations, how many dollars in capital resources does the company actually have?

In order to calculate these Risk-Adjusted Capital Ratios, we follow these steps:

First, we find out how much capital a company actually has by adding the company’s resources which could be used to cover unexpected losses. These resources are primarily composed of stock issued by the company (capital) and accumulated funds from prior year profits (retained earnings or surplus). Additional credit can also be given for conservative reserving practices.

Companies that set aside more than is necessary in their reserves year after year are less likely to be over-run with claims and forced to dip into capital to pay them. Conversely, companies that understate their reserves will be forced to routinely withdraw from capital to pay claims. Accordingly, we give companies credit for consistent over-reserving and penalize companies for consistent under-reserving.

2. Next, we determine how much capital the company should have to cover moderate losses based upon the company’s level of risk in both its insurance business and its investment portfolio. We examine each of the company’s risk areas and determine how much capital is needed for each area, based on how risky it is and how much exposure it has in that area. Then we combine these amounts to arrive at a total risk figure.

Credit is given for a company’s diversification, since it is unlikely that “the worst” will happen in all areas at once.

3. We then compare the results of Step 1 with those of Step 2 to arrive at the Risk-Adjusted Capital Ratio #1. Specifically, we divide the “capital resources” in step 1 by the “target capital” in step 2 and express it as a ratio.

If a company has a Risk-Adjusted Capital Ratio of 1.0 or more, it means the company has all of the capital we believe it requires to withstand potential losses which could be inflicted by a moderate economic decline. If the company has a ratio of less than 1.0, it does not currently have all of the capital resources we think it needs.

During times of financial distress, companies often have access to additional capital through contributions from a parent or holding company, current profits or reductions in dividends. Therefore, we make an allowance for firms with Risk-Adjusted Capital Ratios of somewhat less than 1.0.

4. To calculate Risk-Adjusted Capital Ratio #2, we repeat Steps 2 and 3 but now assume a severe loss scenario.

We convert RACR #1 and #2 into a Risk-Adjusted Capital index. It is measured on a scale of zero to ten, with ten being the best and seven or better considered strong.

Currently, there are 229 recommended insurers with RACR#1 and #2 of 1.0 or higher, and a Risk-Adjusted Capital index of 7.0 or higher.

To give you the best-capitalized recommended insurers, I picked out the top 10 largest by total assets with RACR#1 and RACR#2 of 2.0 or higher, and a Risk-Adjusted Capital index of 10.

Recommended Insurers with Highest Risk-Adjusted Capital Ratios

As you can see from this list above, there isn’t one industry completely dominating the list. We have four P&C companies, three life insurers, and three health insurance companies. This suggests that with the right information and tools, you can certainly find a safe company to entrust with your property — and even your life.

So be sure to use Weiss Ratings in your search as we can make your life much easier in making a pick.

Think Safety,

Gavin Magor

Insurance Insights Edition, By Gavin Magor, Senior Financial Analyst Gavin has more than 30 years of international experience in credit-risk management, commercial lending and insurance, banking and stock analysis and holds an MBA. Gavin oversees the Weiss ratings process, developing the methodology for Weiss’ Sovereign Debt and Global Bank Ratings. Gavin has appeared on both radio and television, including ABC and NBC as an expert in insurance, bank and stock ratings and has been quoted by CNBC, The New York Times, Los Angeles Times, and Reuters as well as several regional newspapers and trade media.