<p> Life/A&H/Fraternal Financial Analysis Handbook – Annual 2012 / Quarterly 2013 I. Introduction – C. External Information</p><p>There is a considerable amount of information available to assist the analyst in reviewing insurance companies. The NAIC maintains financial databases developed from the insurer filings and state insurance department actions, all of which are described in more detail in the next chapter. In addition to the NAIC information, there are a number of external sources of information available from the major rating agencies and industry analysts. The analyst should refer to these sources of information in order to increase his or her knowledge of the insurer’s financial position, and to corroborate the financial information filed by the insurer with the NAIC and state insurance departments. These sources of information are all available through direct purchase or subscription order from the rating agencies and/or industry analysts. Following is a discussion of the major sources of external information available to the analyst.</p><p>Rating Agencies There are five major rating agencies that analyze insurance companies. Each has its own unique methodology for assigning ratings. The rating agencies also produce other types of financial information that may be helpful to the analyst. The following paragraphs briefly describe each of the major rating agencies and the types of financial information available. 1. A.M. Best—The A.M. Best Company has been rating insurance companies since 1900. The objective of Best’s rating system is to evaluate the factors affecting the overall performance of an insurance company to provide its opinion as to the company’s relative financial strength and ability to meet its contractual obligations. Best conducts an extensive quantitative and qualitative evaluation of rated insurers based on various sources of information and knowledge of the company accumulated over a long period of time. This knowledge is acquired through frequent contacts with company officials as well as by examining statutory financial statements, special questionnaires and a variety of other sources. To obtain an A.M. Best rating, a newly-rated insurer should have a credible business plan, experienced management, financial sponsorship/support, submit the requested financial information, and pay a fee. The ratings are available through Best’s Key Rating Guide and Best’s Rating Online. Best also publishes Best’s Aggregates and Averages, Best’s Ratings Reports, Best’s Key Rating Guide, as well as many other publications, directories, reports and periodicals.</p><p>2. Fitch—Fitch Ratings was founded as the Fitch Publishing Company on Dec. 24, 1913. Fitch began as a publisher of financial statistics and soon became the recognized leader in providing critical financial statistics to the investment community. In 1924, Fitch introduced the “AAA” to “D” ratings scale along with in-depth analysis that was completed by a staff of investment experts. Fitch’s ratings evaluations are qualitative and quantitative. Fitch provides two basic types of ratings, insurer financial strength (IFS) rating and issuer and fixed income security rating. The ratings are obtained via in-depth industry, operational, organization, management, and financial reviews. The ratings are available through Fitch’s National Ratings List and Fitch Ratings Online.</p><p>3. Moody’s Investors Service—Moody’s Investors Service was founded in 1900. Moody’s ratings of debt securities include taxable bonds, structured financings and municipal bonds in the U.S. tax-exempt market. In addition, Moody’s rates U.S. Treasury debt, deposits of banking groups, credit risk exposure in derivative markets and insurance claims. In the insurance sector, Moody’s has been rating the debt securities of insurance companies since the mid-1970s and assigning insurance company financial strength ratings since 1986. Moody’s financial strength ratings reflect its opinion as to an insurer’s ability to discharge senior policyholder obligations and claims. It seeks to measure “credit risk” (e.g., the risk that an insurer will fail to honor its senior policyholder claims in full and on a timely basis). Moody’s financial strength ratings are based on qualitative analysis. Moody’s disseminates its ratings through various publications. Moody’s publishes credit opinions on a semi-annual basis and in-depth analysis, industry outlooks and a statistical handbook on an annual basis. Moody’s also publishes insurance financial strength ratings lists and insurance debt lists monthly. 4. Standard and Poor’s—Standard and Poor’s (S&P) has been rating bonds since 1923 and insurance companies’ claims-paying ability since 1983. S&P’s insurer rating activity draws from its expertise and</p><p>© 1998-2013 National Association of Insurance Commissioners Life/A&H/Fraternal Financial Analysis Handbook – Annual 2012 / Quarterly 2013 I. Introduction – C. External Information</p><p> procedures in rating debt issues and utilizes a similar classification framework, but is conducted by professional analysts whose background, experience and/or training is focused on the insurance industry. S&P sees its role as one of providing risk assessment of insurers to insurance buyers rather than serving as an advisor to insurers to assist them in improving their financial condition and rating. S&P’s claims- paying ability rating is an assessment of an operating insurance company’s financial capacity to meet its policyholder obligations in accordance with their terms. Claims-paying ability ratings are based on a comprehensive quantitative and qualitative financial analysis using various sources of information, including extensive interviews with company management, detailed financial data and projections, market share information, details of their investment portfolio, reinsurance program, and organizational structure.</p><p>5. Weiss Ratings, LLC, formerly TheStreet.com—TheStreet.com sold the insurance and bank ratings back to Weiss Group in 2010. Martin D. Weiss, founder of Weiss Research, has been publishing newsletters about money markets, interest rates, bank safety, and economic forecasting since 1971. In 1989, Weiss began publishing financial strength ratings of life, health, and annuity insurers and in 1993 they began publishing the financial strength ratings of property/casualty insurers. Weiss’ methodology and rating scale has generated some controversy within the industry. Weiss’ financial strength rating indicates its opinion regarding an insurer’s ability to meet its commitments to its policyholders under current economic conditions. An insurer’s rating is determined based on a detailed analysis of numerous factors that are synthesized into a series of indexes such as capitalization, investment safety, reserve adequacy, profitability, liquidity, and stability. The data for the analysis is obtained primarily from statutory financial statements filed with the NAIC; however, the data is supplemented by information requested from the insurer. Weiss emphasizes that it bases its analysis exclusively on objective, quantifiable information and other financial information provided by the insurers. Unlike other rating agencies, the Weiss Ratings product line does not accept compensation from the companies it rates nor does it allow the rated companies to influence the rating. Weiss supports its insurer rating activities through the sale of its rating information to the public.</p><p>Industry Analysts In addition to the rating agencies, many of the investment houses and stock research firms do considerable research on the insurance industry. The following paragraphs briefly describe several sources. 1. Investment Houses—The major Wall Street firms dedicate considerable resources towards researching insurance industry issues. In general, much of this type of research is oriented towards emerging issues facing the industry. Specific insurance company research is also available, but is generally limited to companies with publicly traded debt or equity securities.</p><p>2. Ward’s Results—Annually, Ward Financial Group publishes a financial reference series entitled Ward’s Results, available in separate Life, Health & Annuity and Property-Casualty editions. The books include financial benchmarks for U.S.-domiciled insurers, including unique peer group benchmarks. Each company is grouped into peer groups that consider the insurer’s product mix, premium volume and geographic mix of business. In addition to peer group benchmarks, the books also include top performing, stock company and mutual company benchmarks.</p><p>Securities and Exchange Commission (SEC) Filings Insurers that offer debt or equity securities to the public must register with the Securities and Exchange Commission (SEC) and fulfill various reporting requirements. Where applicable, the various SEC filings provide significant background information about the insurer and can assist the analyst in corroborating the information filed by the insurer with the NAIC or state insurance departments. Most of the filings are available through SEC’s Electronic Data Gathering Analysis & Retrieval (EDGAR) system via the SEC’s website (www.sec.gov) at no charge, as well as on CD-ROM. While the SEC filing requirements are quite comprehensive, the following summarizes three of the SEC filing forms that may be of particular interest to the analyst.</p><p>© 1998-2013 National Association of Insurance Commissioners Life/A&H/Fraternal Financial Analysis Handbook – Annual 2012 / Quarterly 2013 I. Introduction – C. External Information</p><p>1. Form 10-K is used to fulfill the SEC’s annual reporting requirements. The 10-K must be filed with the SEC within 90 days after the insurer’s year-end for a non-accelerated filer. Accelerated filers must file the 10-K 60 or 75 days after their fiscal year-end, depending on whether they are considered a large filer. Information incorporated into the 10-K includes: . Item 1—Business  Item 1A—Risk factors  Item 1B—Unresolved staff comments . Item 2—Properties . Item 3—Legal proceedings . Item 4—Mine Safety Disclosures . Item 5—Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities . Item 6—Selected financial data  Item 7—Management’s discussion and analysis of financial condition and results of operations  Item 7A.—Quantitative and qualitative disclosures about market risk . Item 8—Financial statements and supplementary data . Item 9—Changes in and disagreements with accountants on accounting and financial disclosure  Item 9A—Controls and procedures  Item 9B—Other information . Item 10—Directors, executive officers and corporate governance . Item 11—Executive compensation . Item 12—Security ownership of certain beneficial owners and management and related stockholder matters . Item 13—Certain relationships, related transactions and director independence . Item 14—Principal accounting fees and services . Item 15—Exhibits and financial statement schedules</p><p>2. Form 10-Q is used to fulfill the SEC’s quarterly reporting requirements. The 10-Q must be filed with the SEC within 40 days for an accelerated filer and 45 days for a non-accelerated filer after the end of each of the first three fiscal quarters and must include a condensed income statement, a condensed balance sheet and an abbreviated statement of cash flow.</p><p>© 1998-2013 National Association of Insurance Commissioners Life/A&H/Fraternal Financial Analysis Handbook – Annual 2012 / Quarterly 2013 I. Introduction – C. External Information</p><p>3. Form 8-K is used to report material events or corporate changes that have not yet been reported. The 8-K is required after any of the following events occur: . Change in control . Major acquisition or disposition of assets (for certain acquisitions and dispositions, historical and pro forma financial statements are required) . Bankruptcy or receivership . Change of independent accountant . Resignation of registrant’s directors . Change in fiscal year . Other events—see SEC’s website for details</p><p>Other External Sources In addition to the specific sources referenced above, other resources that provide updates about the industry and specific insurers include: . Business Insurance . BestWeek . Best Review . National Underwriter . The Wall Street Journal . Bloomberg Financial . Factiva . Insurance Journal . Individual company websites</p><p>© 1998-2013 National Association of Insurance Commissioners</p>