In September, Fitch reduced its ratings on more than 30 leading life insurance companies as part of a "general industry review." Those companies included such stalwarts as MetLife, Manulife, John Hancock, The Hartford Life, Jefferson-Pilot and Guardian.

You have an opportunity to help clients and prospects evaluate the strength of guarantees standing behind their life insurance and annuity products. But this issue is always a dilemma for financial advisors. On the one hand, you may not want to prey on vulnerable companies and become an industry pariah. On the other, you can't stay silent and let clients sink into a debacle such as thousands of policyholders faced a decade ago, after Executive Life's demise.

There are no easy answers to this situation. So, let's address facts, and then you can decide.

Conseco

Conseco is among the largest insurance conglomerates in the U.S., with annual premium flow of about $3 billion. The holding company (Conseco, Inc.) encompasses 15 separate insurance companies-none of which are rated better than D+ by Weiss Ratings. The company's common stock now trades for pennies per share.

Conseco, Inc. has more than $6 billion of bonds on its books, and not enough liquidity or cash flow to pay interest and principal. In September, the corporation defaulted on the first $2.5 billion in debt and was downgraded to D for credit purposes (default) by Fitch. It is expected that the parent company will seek bankruptcy protection within months.

At a time when every life insurance company under the sun seems to be aiming at the "affluent market," Conseco has done a masterful job marketing to "middle Americans"- Mom and Pop investors who buy $10,000 fixed annuities. Conseco says annuities account for 30% of its total premium flow and, remarkably, its fixed annuity sales have held steady at about $200 million per quarter right through the second quarter of 2002 (although variable annuity sales have fallen). This is a testament to Conseco's strong multi-channel marketing machine, which combines career agents, independents, and direct marketing.

It is possible that several Conseco insurance companies could survive a corporate bankruptcy, but only if Mom and Pop keep sending in those $10,000 checks while their insurance company's financial woes are being widely reported. If all (or most) Conseco companies fall into a "rescue and reorganization" plan, it could be the largest life/health failure in U.S. history. The most visible failures to date occurred in 1991 and involved Mutual Benefit Life and Executive Life, which then ranked as the 21st and 33rd largest U.S. life companies, with assets of $13.5 billion and $10.1 billion respectively. For comparison, Conseco claims total "managed assets" (including separate account money) of $85 billion and has $28 billion of policy liabilities. (A.M. Best ranks Conseco as the 26th largest U.S. life insurance company.)

If a Conseco bailout eventually taps state insurance guaranty funds, the results could ripple through the industry, since other companies would foot most of the bill through higher premiums. If Conseco helps to make financial strength a front-page issue, other vulnerable companies also could be affected by negative publicity.

Millions of people own Conseco products, especially in the company's Midwest base of operations. Should you seek out those prospects and help them evaluate their options before it's too late? You decide.

How to Evaluate Vulnerable Companies

Five companies rate the financial strength of U.S. life/health companies, and four-Best, Standard & Poor's, Moody's and Fitch-make their ratings available on the Web for free. The fifth, Weiss Ratings, charges $7.50 per rating accessed on the Web. You can access these sites at:

• www.ambest.com/ratings/index.html
• www.fitchratings.com (requires free password)
• www.moodys.com (click "Insurance" and then "Insurance Financial Strength Ratings)
• www.standardandpoors.com/RatingsActions/RatingsInquiries.html (ratings returned by e-mail)
• www.weissratings.com

But the real question is whether these agencies can predict the demise of a company before it's too late for your clients. One company, Weiss Ratings, has documented on its Web site why it is the leader in predictive analysis. You can read that story, including findings of a U.S. Government (GAO) report, at www.weissratings.com (Weiss' Track Record).

Now that consumers have begun to question the objectivity of financial analysts in general, the Weiss story has credibility. Weiss is alone among the five agencies in refusing to charge insurance companies for ratings. Weiss does not ask permission to rate a company, nor do they allow companies to influence or suppress ratings. Weiss rates more life/health companies (1,572) than any other agency and are stingier with their top ratings. For example, 69% of companies rated by Best qualify for their top five categories, but only 20% of companies rated by Weiss merit the top five.

On its Website, Weiss lists 51 life and health insurance company failures since 1997. In 33 cases, Weiss rated the company at the time of the failure, and in no case was their rating higher than C.

Currently, Weiss rates about 900 U.S. life/health companies at C or worse. Should you help people who participate in those companies evaluate their options? You decide.

A Great Resource

To stay current on ratings and related action, use the Web sites of the five agencies. But for general reference and background, you can purchase one resource for $20 that will become an indispensable desktop tool. This is the "Special Ratings Issue" published annually by The Insurance Forum, in September of each year.

This issue contains ratings (as of publication) for all agencies and all rated U.S. life/health companies-4,183 financial strength ratings in total. It provides details on how each agency generates ratings and the breakdown of ratings categories (for each agency) and number of companies in each.

It includes 228 "suggested companies for conservative consumers," divided into three tiers of highest quality (based on collective ratings). On the other end of the spectrum, a "Watch List" identifies 813 companies with one or more low ratings or abnormal financial ratios. You can learn more about the issue and order it on the Web at http://www.theinsuranceforum.com/ratings.html

Should you focus your insurance and annuity marketing on the 228 high-quality companies, while alerting people who hold products of "Watch List" companies? You decide.

Tough Questions

If you dig deeper into those 813 Watch List companies, other questions arise that you may want to bring to the attention of clients and prospects. Let's consider two examples.

One involves American Skandia, with a Weiss rating of D+ and five abnormal financial ratios. American Skandia consistently ranks in the top 15 in U.S. variable annuity sales. It is believed to rank first in sales of this product through independent financial planners and broker-dealers. As the American affiliate of a Swedish insurance holding company, it is part of a financially strong organization.

The real story behind this company is retrenchment and probable merger or acquisition. Earlier this year, American Skandia announced that it would discontinue sales of flexible premium variable life insurance and qualified plans, to focus on its core business in variable annuities and mutual funds. In September, The New York Times reported that the Swedish parent is "exploring several options for its American subsidiary, including an outright sale or merger." The Times said analysts believe that "without a sustained rebound in the world's equity markets, it will be difficult for Skandia to return to profitability in the United States."

American Skandia probably will be merged or acquired at a value of up to $1 billion. But it is also possible for announcements of retrenchment, financial difficulty and merger talks to trigger a "fire sale" environment. Should financial planners and broker-dealers re-evaluate their relationships with this company, based on disconcerting events and publicity (partly generated by the company itself)? You decide.

Another Watch List company is Presidential Life, listed with a Weiss rating of C and four abnormal ratios. Presidential is a public company worth more than $400 million, headquartered in the quaint Hudson River (NY) town of Nyack. Founded in 1965, the company has long been a leader in selling high-yield fixed annuities through independent advisors and broker-dealers in the Northeast, and it is also known for aggressive investment policies. In a September report, Fitch noted the "adverse performance" of the company's investment portfolio in 2002 along with "product concentration in the fixed annuity line, high allocation to risky assets and low statutory capitalization relative to industry averages."

But none of this may be the main issue. For 37 years, the company has had the same founder, chairman, CEO and largest stockholder. His name is Herbert Kurz and he has become a legendary insurance industry figure, because he continues to lead the company at age 82.

Should you tell Presidential Life customers that the financial strength of their company depends on the acumen, drive, and health of an 82-year old CEO? You decide.