Chapter 3: highly rated insurers.

A Push to the Forefront

For the A.M. Best Co., 1905 and 1906 proved to be pivotal years in its rise to prominence on the credit ratings landscape. Founded in 1899 by Alfred M. Best, the company first operated out of a single room in New York's financial district; its first effort a volume on reports of insurance companies from all classes except life.

All of A.M. Best Co.'s rating actions for all rated companies were traced back to 1906 and entered into the company's proprietary database. Because A.M. Best's rating scale has changed over time as part of a constant effort to improve accuracy and adapt to changes in the insurance industry, it was necessary in certain circumstances to translate or convert various older ratings to conform to the present rating scale. These translations do not represent any material change or re-evaluation of a company's rating.

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An Unsavory Relationship

During the last decade of the 19th Century, leading life insurers were enjoying a great accumulation of capital as many smaller rivals went under during a period of depression in the previous two decades. Simultaneously, the trust company business was growing rapidly. The two forces joined, and soon the insurance companies were flowing cash assets into the trust companies' coffers for investment in large-scale railroad and industrial projects. This move essentially put the insurance companies into the banking business, corrupting the nature of what historically had been a conservative industry.

This relationship between the executives of big life insurance companies and some prominent Wall Street figures did not go unnoticed, and in 1905, the New York Legislature formed an investigative committee to examine the state's insurance companies and make recommendations for regulatory reform.

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The committee was headed by William W. Armstrong, a state senator.

The Armstrong investigation, which heard testimony from banking and insurance giants, brought many dubious business practices to light. As a result of the investigation, the Insurance Act of 1906 was adopted. It forced insurance companies to regulate the nature of their investments, restrict commission sizes and distribute dividends annually.

The A.M. Best Co., in anticipating these results, put together a volume of reports on life insurance companies to fully cover the whole insurance field. The company's first ratings appeared in 1906, when the New York Insurance Department, which had asked Best for secret help, did not keep his input hidden.

The last quarter of the 19th Century was very prosperous for Lloyd's, as business from brokers began to land back in London from the United States and other sources overseas. In New York, special licenses were issued to those brokers authorizing them to place insurance with nonadmitted insurers, so long as the market of admitted companies had been exhausted. The insurance department, claiming to be looking to aid its examiners of these brokers, asked Best to prepare a confidential list indicating an opinion of the brokers' reliability by the numbers one through five, with a one reflecting the highest grade.

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The department, instead, told all of these brokers of the list, and notified them that it could be used to revoke their license. Because of that, A.M. Best decided to use the list as part of its first ratings guide.

1906 Earthquake

Around the same time as these events, and over 2,500 miles away, San Francisco was burning, reeling in the aftermath of a massive earthquake which hit about 5:12 a.m on April 18, 1906.

The Great Quake and Fire, as the event is known, ranks as the most deadly in U.S. history. The death toll is uncertain, but it is thought that 700 to 3,000 people perished.

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The 7.9-magnitude temblor broke gas lines, fractured chimneys and toppled chemical trucks, sparking numerous fires and leaving hundreds of thousands of residents homeless. Golden Gate Park became a refugee camp.

Over the rest of the year, A.M. Best compiled and then released a special report on the paying practices of the 243 insurers and reinsurers involved. This report showed not only the amount of the loss sustained by each company, gross and net, but also its general policy in paying the conflagration claims. The report did not shy away from criticism, as excerpts show:

"Taken as a whole, the companies paid their losses remarkably well, but it is nevertheless the fact that there were many companies which, while able to pay in full, met their creditors in an arbitrary and technical spirit."

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"An insurance company which meets its obligations under ordinary conditions, but which in the face of extraordinary losses endeavors in every way to evade its just obligations, is not the company which the thoughtful and conservative business man will choose to indemnify him against loss."

The loss report, which brought Best's work to the attention of many business concerns purchasing insurance, established A.M. Best Co. as a trusted source of financial solvency data.

Three of the four letter or numerical components in A.M. Best's 1907 rating scale are seen here. The first column, not seen, reflected combined capital and surplus, ranked by an alpha-rating scale. The third column, specific to claims incurred from the 1906 earthquake, was discontinued in 1919.

Evolution of Rating Scale

The original A.M. Best Co. rating system, implemented in 1906, applied only to property/ casualty insurers. The Desirability Ratings consisted of two components: a loss-paying record, ranked on an alpha scale with "A" being the best; and a rating of management quality, ranked on a numeric scale with "1" being the best.

In 1932, the General Policyholders Ratings scale was adopted. It had two components: the Net Resources Rating, the forerunner of today's Financial Size Category; and the General Policyholders Rating, which evolved into today's Financial Strength Ratings.

From 1935 through 1975, letter ratings were not assigned to life/health companies. Instead they had "comments." in order to complete this rating history project, a translation was devised to convert those "comments" to equivalent letter ratings. For example, from 1935 to 1952, "More than Ample" was found to be equivalent to today's "A" rating.

Property/Casualty Insurers
Rated A or Higher for 75 Years

                                           Rated A
                                           or Higher   Current
Company Name                       AMB#    Since       Rating

AIG Casualty Co.                   02349   1928        A
American Automobile Ins. Co.       02176   1933        A
American Insurance Co.             02177   1934        A
American States Insurance Co.      02287   1930        A
Amica Mutual Insurance Co.         02162   1922        A++
Baltimore Equitable Society        03225   1933        A+
California State Auto Assn. IIB    00228   1927        A+
Camden Fire Insurance Assoc.       02193   1934        A
Continental Casualty Co.           02128   1922        A
Country Mutual Insurance Co.       02249   1931        A+
Euler Hermes Amer. Credit Ind.     02097   1922        A+
Farmers Mutual Ins. Co. of NE      00371   1922        A
Federal Insurance Co.              02084   1907        A++
Federated Mutual Ins. Co.          00384   1934        A+
Fidelity and Deposit Co. of MD     00387   1922        A
Fireman's Fund Insurance Co.       02179   1924        A
General Ins. Co. of America        02447   1926        A
General Reinsurance Corp.          02198   1928        A++
Germantown Mutual Ins. Co.         00414   1923        A
Granite State Insurance Co.        02360   1925        A
Great American Insurance Co.       02213   1908        A
Great Northern Insurance Co.       02085   1923        A++
Hartford Accident & Indem. Co.     02230   1922        A
Hartford Casualty Ins. Co.         02229   1930        A
Hartford Fire Insurance Co.        02231   1907        A
Hartford Steam Boiler I & I        00465   1922        A+
Hartford Underwriters Ins. Co.     02232   1926        A
Insurance Co. of the State PA      02035   1934        A
Lititz Mutual Insurance Co.        00558   1932        A+
Merrimack Mutual Fire Ins. Co.     02055   1920        A+
Montgomery Mutual Ins. Co.         00662   1925        A
Munich Reinsurance America Inc.    00149   1923        A+
Mutual Assurance Society of VA     03260   1933        A+
National Fire Ins. Hartford        02129   1914        A
National Union Fire Ins. Co. PA    02351   1934        A
Nationwide Mutual Ins. Co.         02358   1929        A+
New Hampshire Insurance Co.        02363   1907        A
New Jersey Manufacturers Ins.      00694   1934        A++
OneBeacon Insurance Co.            02196   1934        A
Pacific Indemnity Co.              02385   1928        A++
Peerless Insurance Co.             02394   1922        A
Pharmacists Mutual Ins. Co.        00320   1922        A
Philadelphia Contrib for Ins.      03112   1922        A+
Providence Mutual Fire Ins.        00787   1918        A
Quincy Mutual Fire Ins. Co.        00796   1922        A+
Selective Ins. Co. of America      00826   1930        A+
St. Paul Fire & Marine Ins. Co.    02452   1926        A+
State Automobile Mutual Ins. Co.   00855   1925        A+
State Farm Mutual Auto Ins. Co.    02479   1929        A++
Tri-State Insurance Co. of MN      00918   1927        A+
Twin City Fire Insurance Co.       02235   1921        A
United Services Auto Assn.         00934   1927        A++
Western Surety Co.                 00974   1935        A
Westfield Insurance Co.            02382   1934        A
Westport Insurance Corp.           00347   1922        A

Source: A.M. Best Data. Ratings as of May 18, 2009

Property/Casualty Insurers
Rated A or Higher for 50 Years

                                           Rated A
                                           or Higher   Current
Company Name                       AMB#    Since       Rating

Alfa Mutual Insurance Co.          02005   1953        A+
American Agricultural Ins. Co.     03133   1953        A
American Cas. Co. Reading, PA      02127   1949        A
American Family Mutual Ins. Co.    02022   1939        A
American Home Assurance Co.        02034   1944        A
American Intern Pacific Ins. Co.   02359   1936        A
American Security Insurance Co.    02049   1952        A
American States Ins. Co. of TX     02290   1956        A
Associated Indemnity Corp.         02178   1939        A
Barnstable County Mut Ins. Co.     00203   1949        A
Bay State Insurance Co.            02053   1956        A+
Bear River Mutual Ins. Co.         00209   1955        A
Cambridge Mutual Fire Ins. Co.     02054   1935        A+
Church Mutual Insurance Co.        00259   1951        A+
Cincinnati Insurance Co.           00258   1955        A+
Commerce and Industry Ins. Co.     04000   1958        A
Continental Western Ins Co.        00971   1951        A+
Cumberland Mutual Fire Ins. Co.    00306   1956        A
Economy Fire & Casualty Co.        02276   1939        A
Erie Insurance Exchange            00348   1939        A+
Farm Bureau Mutual Ins. Co.        00354   1946        A
Farm Bureau Mutual Ins. of ID      00355   1959        A+
First National Ins. Co. of Amer.   02446   1940        A
Generali USB                       03073   1957        A+
Great American Assurance Co.       02004   1951        A
Great American Insurance Co. NY    02210   1949        A
Illinois National Insurance Co.    02361   1937        A
Kentucky Farm Bureau Mutual        00540   1949        A+
Madison Mutual Ins. Co. (IL)       00575   1956        A
Merchants Bonding Co. (Mutual)     00594   1958        A
Midwestern Indemnity Co.           02323   1956        A
Mountain West Farm Bureau Mut.     00986   1956        A+
National Fire & Marine Ins. Co.    02428   1954        A++
National Indemnity Co.             02429   1953        A++
National Surety Corp.              02182   1937        A
Nationwide Mutual Fire Ins. Co.    02357   1938        A+
Netherlands Insurance Co.          02393   1949        A
New York Central Mutual Fire       00700   1936        A+
North Star Mutual Ins. Co.         00714   1953        A+
Ohio Farmers Insurance Co.         02381   1935        A
Otsego Mutual Fire Ins. Co.        03152   1938        A+
Pennsylvania General Ins. Co.      02195   1956        A
Safeco Ins. Co of America          02448   1955        A
State Auto Prop. & Cas. Ins. Co.   02475   1954        A+
State Farm Fire & Casualty Co.     02477   1939        A+
Swiss Reinsurance America Corp.    03263   1945        A
Tennessee Farmers Mutual Ins.      00886   1954        A++
Transportation Insurance Co.       02131   1941        A
Union Insurance Co.                02532   1951        A+
United States Liability Ins. Co.   02541   1955        A++
Universal Surety Co.               02543   1952        A
Universal Underwriters Ins. Co.    02297   1955        A
Valley Forge Insurance Co.         02132   1950        A
Vigilant Insurance Co.             02086   1943        A++
Western Surety Co.                 00974   1935        A

Source: A.M. Best Data. Ratings as of May 18, 2009

Life/Health Insurers
Rated A or Higher for 75 Years

                                           Rated A
                                           or Higher   Current
Company Name                       AMB#    Since       Rating

Aviva Life and Annuity Co.         06199   1929        A
Beneficial Life Ins. Co.           06162   1929        A
Country Life Ins. Co.              06294   1933        A+
Genworth Life and Annuity Ins.     06648   1928        A
John Hancock Life Insurance        06601   1928        A++
Metropolitan Life Ins. Co.         06704   1928        A+
Nationwide Life Ins Co. of Amer.   06971   1928        A
New York Life Ins. Co.             06820   1928        A++
Northwestern Mutual Life Ins.      06845   1928        A++
Penn Mutual Life Ins. Co.          06903   1928        A+
Principal Life Insurance Co.       06150   1928        A+
Prudential Ins. Co. of America     06974   1928        A+
Standard Insurance Co.             07069   1928        A
Western and Southern Life Ins.     07243   1928        A++

Source: A.M. Best Data. Ratings as of May 18, 2009

Best's Key Ratings, 1907

SECOND COLUMN OF RATINGS:

A Excellent Loss-Paying Record   1 Excellent Management
B Good Loss-Paying Record        2 Good Management
C Fair Loss-Paying Record        3 Fair Management
D Poor Loss-Paying Record        4 Poor Management

THIRD COLUMN OF RATINGS

1 Excellent San Francisco record
2 Good San Francisco record
3 Fair San Francisco record
4 Poor San Francisco record

Life/Health Insurers
Rated A or Higher for 50 Years

                                           Rated A
                                           or Higher   Current
Company Name                       AMB#    Since       Rating

American General Lf. & Accident    06788   1948        A
American National Ins. Co.         06087   1941        A+
American United Life Ins. Co.      06109   1950        A
Canada Life Assurance Co.          06183   1939        A+
Columbus Life Insurance Co.        06244   1938        A++
Great-West Life Assurance Co.      06493   1945        A+
Guardian Life Ins. Co. of Amer.    06508   1947        A++
Hartford Life Ins. Co.             06518   1940        A
Kansas City Life Ins. Co.          06605   1952        A
Liberty Life Insurance Co.         06175   1954        A
Liberty National Life Ins. Co.     06629   1958        A+
Lincoln National Life Ins. Co.     06664   1940        A+
Manufacturers Life Ins. Co.        06688   1939        A++
Massachusetts Mutual Life Ins.     06695   1939        A++
Minnesota Life Ins. Co.            06724   1940        A+
Nationwide Life Ins. Co.           06812   1954        A+
Pacific Life Insurance Co.         06885   1959        A+
Protective Life Ins. Co.           06962   1940        A+
ReliaStar Life Insurance Co.       06846   1945        A
State Farm Life Ins, Co.           07080   1954        A++
Sun Life Assur. Co. of Canada      07101   1946        A+
United of Omaha Life Ins. Co.      07164   1956        A+
United States Life Ins. of NY      07192   1959        A

Source: A M. Best Data. Ratings as of May 18, 2009