I am wondering what is the purpose for the insurance companies to pay for the services of credit rating agencies? For the corporations and banks the purpose is quite clear: they need ratings in order to attract investment. But in the case with insurance companies they do not need to attract investments as they have enough money (from the underwriting activity) and they are actually one of the biggest institutional investors themselves.
I searched in the internet but didn’t find any clear answer to this question.
Auditors are a pain in the ass at insurance companies. There are all sorts of gaap and statutory rules you have to follow. If you get downgraded (because risk of not being able to meet liabilities) all hell breaks lose. Thankfully, in life insurance there are nerds called actuaries roaming the halls, calcing the asset/liability balance in their heads, running out 100yr models. This isn’t a very technical answer I know…but ratings do matter. Companies can and do use them into their marketing materials to attract customers, and discredit the competition.
Because the bold part is completely false, like saying banks don’t need to have a rating because they get all their money from deposits. You show me an insurance company with a rating and I’ll pull you a list of outstanding debt issuances.
^ Oh yeah, there’s that too. Been forever since I was involved in this stuff, but both going public or issuing debt, means everyone sniffs around your stuff for months. It’s painful. Not like the auditors can understand asset/liability models…
insurance companies need to raise money to cover unexpected loses. when that happens they go to capital markets to raise capital. in this case lenders look at the insurance company’s credit rating and other criteria when extending capital.
also some insurance companies break even or lose money on the underwriting part of the business and make up for it by managing the securities portfolio aggressively . ex: CINF
his bolded statement could be true if he were talking solely about mutual insurance companies. once you demutualize you need to raise debt capital to create an efficient financial structure and finance growth. the purpose of demutualization is to grow (i.e. spend money you don’t already have to acquire future profits).
What I meant by that statement is that the need for insurance companies to raise debt is much lower than for banks, for example. Of course they are raising debt, as well, but it comprises much lower percentage of their balance sheet compared to the banks. But thanks for the answers it is starting to become more clear
It doesn’t matter what the percentage is of their balance sheet. What you said was they “don’t need capital market access and why they would pay for a rating if they don’t need to attract money for investments”, when in fact they do. If you want to issue debt into public markets, you pretty much need a rating.
Most mutual insurance companies that are even of moderate size have publicly traded debt outstanding to fund operations even if the equity is privately held.
^ thus, could, be true. many small and moderate sized mutuals will simply attain a line of credit from their local bank to ease cash flow timing issues. no expensive rating or investment banking required.
Exactly, but those wouldn’t have a rating as you pointed out. The OP’s original question was why would an insurance company be rated. The answer would be to have public debt.
What does the fact an insurance company has a license in good standing with the State imply in regard to credit worthiness? Anything at all? You would think it would be a minimum “rating”…
Not exactly. With specific ratings, you get variable grades. You know, AAA (or whatever) for the best companies. Ratings can and do change over time.
Licenses are just binary. They don’t differentiate between the good companies and the mediocre companies. A company about to go out of business will keep its license intact as long as it can. A rating agency would theoretically downgrade said company long before a license is lost.
Simply meant, for example, a rating is AA, or whatever, until it is not, analogous to your license comment, you have that particular rating until you dont. Certainly a license as many requirements, like each specific rating level.
Yes, I get what you are saying. Though my point is that an intact state license is a poor substitute for a rating. If an intact license status is to be used as a substitute for a rating, then it could only be used as the absolute minimum passing rating (i.e., not a good rating). No further information can be gleamed from it.
