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Weiss Ratings |
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Reprinted with permission
Journal of Business & Finance Librarianship
Volume 6, Number 4 (2001)
An Interview with David Lackey,
President of Weiss Ratings, Inc.
Weiss Ratings, Inc. judges the financial stability of over 16,000 financial institutions including insurance companies, health maintenance organizations (HMOs), banks, savings and loan associations, and securities brokers. The company also rates the risk-adjusted performance of more than 10,000 stock, bond, and money market mutual funds. Subscriptions to the Weiss ratings are available online through the company's Internet site. The Weiss Ratings site (www.weissratings.com) also includes some free ratings data. Paper copy subscriptions range from robust annual or quarterly directories, with ratings on all companies within a given industry, to a one-page consumer update on an individual. For a small fee, subscribers can also receive the Weiss rating for a company by phone.
Martin D. Weiss, PhD., founded Weiss Research in 1971. During the early years he advised private consulting clients on the safety of financial institutions and investments. Then in 1987, Weiss began formally issuing safety ratings on the entire banking industry. Weiss Ratings began covering insurance companies in 1989 as the first rating agency to independently rate the entire insurance industry. It was also the first rating agency to evaluate Blue Cross Blue Shield plans (1991), the first to track securities brokerage firms (1992), and the first to rate the financial condition of HMOs (1994).
Weiss Ratings is known for its independent approach toward evaluating the financial condition of a company. Weiss is able to maintain total objectivity because it does not accept any compensation whatsoever from the companies it rates; nor does it provide companies with any advance preview of their ratings. Moreover, Weiss does not give companies the right to suppress publication of an unfavorable rating. Companies receiving a favorable rating are permitted to publicize it in their advertising; however, Weiss will pursue legal action against companies that misrepresent their ratings. For these reasons Forbes has called Martin Weiss "Mr. Independence" and the New York Times has anointed him "the bad boy of insurance ratings." A search of the basic business bibliographic databases reveals that companies consider a good rating from Weiss Ratings to be a good and newsworthy event.
Weiss Ratings, Inc., 15430 Endeavour Drive, Jupiter, FL 33478: 1-800-289-9222. Internet: www.weissratings.com
JBFL: David, first would you tell us a little about the genesis of Weiss Ratings. How and why was the company founded?
Weiss Ratings is actually a by product of the original business operation, Weiss Research. Dr. Martin Weiss initially began evaluating only a handful of banks and insurance companies for his monthly newsletter, recommending a short list of top-notch institutions to his clients where he was certain their money would be safe. Then as the number of bank failures climbed in the 1980's, customer inquiries about individual institutions multiplied to the point where Weiss felt compelled to rate the entire banking industry. This led him to found Weiss Ratings as a separate business entity designed specifically to help consumers by providing reliable evaluations of their banks' safety.
JBFL: In addition to banks, what other types of companies does your firm rate for safety?
We have since expanded beyond banks and thrifts to rate other companies in the financial services arena, such as insurance companies, HMOs, and brokerage firms. We also just recently introduced our mutual fund ratings based on an evaluation of each fund's risk-adjusted performance.
JBFL: Weiss Ratings appears to be best known for its insurance company ratings. How did the company transition from its start in banking into insurance?
As the banking crisis worsened in the late 1980s, we knew that the financial turmoil was having an impact on the insurance industry as well. However, the established rating agencies of the time (A.M. Best, Standard & Poor's, Duff & Phelps, and Moody's) seemed overly reluctant to issue the rating downgrades that we felt were warranted based on deteriorating conditions. You see, those rating agencies rely on rating engagement fees paid by the companies being rated as their primary source of income. Therefore, a downgrade could very well result in the rating agency losing its insurance company customer, and consequently, a chunk of its income.
We found this absurd. What good is a rating agency if it is only allowed to deliver good news? So in 1989, we started formally rating insurance companies with a totally independent approach that gave us the freedom to tell the public both good and bad news about a company when warranted. Of course this ruffled a lot of feathers at first, but we were vindicated when we were the only rating agency to warn the public about two of the largest insurance company failures in U.S. history: Executive Life and Mutual Benefit Life.
JBFL: That must have been quite a feather in your cap. What was the public's reaction?
Yes, that did put us on the map. Moreover though, it openly exposed the conflict of interest that exists at the other rating agencies. In fact, the public outcry was so great at the time that Congress commissioned the U.S. General Accounting Office (GAO) to compare the track record of Weiss against the four other insurance rating agencies. They wanted to know how our little fledgling rating operation had been able to top these well-established firms.
JBFL: And what was the GAO's conclusion?
The GAO's two-year study had three noteworthy findings. First, it confirmed that Weiss rated more insurers than any of the other rating agencies. Second, it declared that Weiss was the first to warn the public of an impending insurance company failure more often than any of the other rating agencies — beating A.M. Best by a margin of three to one. And third, it documented that the Weiss warnings were delivered, on average, eight months earlier than A.M. Best.
JBFL: Do you attribute these findings solely to the conflict of interest that exists at the other rating agencies?
The fact that we rate more companies is a natural by product of our rating process. We rate all companies where we can reliably do so, whether they want to be rated or not. The other rating agencies only rate those companies that request and pay for a rating. So, naturally we're going to rate a larger number of companies.
The fact that we are more accurate than the other rating agencies, I believe, is a tribute to our unbiased rating process. We have taken great pains to eliminate any potential conflict of interest by making the process as objective as possible. I previously mentioned that we don't take any fees from the rated companies. In addition, our staff is prohibited from accepting a free lunch, a free cab ride, or any other type of gratuity that might compromise our objectivity.
JBFL: Do you even talk with a company's management when gathering data to issue a rating?
We do survey the companies quarterly for additional data and any other information they feel may be pertinent to their rating. We do not, however, give them the opportunity to attempt to sway us with elaborate presentations of their grand plans for the future. Until those plans actually generate results, there's no way to objectively quantify how good they are or to what degree they will achieve the desired effect. So while we do welcome management's input to help us understand the company better, our ratings are based solely upon verifiable facts and figures.
JBFL: Where does Weiss get its data for issuing its ratings?
With the exception of our quarterly surveys, all of the data we use comes from publicly available filings collected by the various regulatory agencies. For the banking industry, we receive the quarterly financial statements that banks and S&Ls file with the FDIC. For insurance companies and HMOs, we get the quarterly statements filed with the individual state insurance departments. Brokerage firm ratings are based on their financial filings to the SEC.
JBFL: What about mutual funds?
Mutual fund data is available to us through a number of sources. We currently use a company called Wiesenberger to collect and compile the raw information for us although we have used other vendors in the past.
JBFL: Thank you.
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