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Chapter 3: highly rated insurers.

Article Excerpt
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...

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