Should You Use the Comdex?

Posted at on July 22, 2009

The Comdex is a percentile ranking of life insurance companies derived from the financial strength ratings issued by A.M. Best, Fitch, Moody’s, and Standard & Poor’s. It has received favorable mention in a few trade and consumer publications recently (for example, Marlene Y. Satter, “Saving Grace,” Investment Advisor, June 2009). I use it myself to get a quick idea of whether I am looking at a top-tier or a second-tier insurance company.

The Comdex is calculated by EbixExchange and is available to subscribers of their VitalSigns service. It addresses the difficulty of interpreting the ratings issued by the major agencies, which use different scales.

Suppose an insurance company has a AA rating from Agency 1 and a A+ rating from Agency 2. And suppose the AA rating corresponds to the 90th percentile of the companies rated by Agency 1 — that is, only 10 percent of the companies have a higher rating — and the A+ rating corresponds to the 80th percentile of the companies rated by Agency 2 — that is, only 20 percent of the companies have a higher rating. The Comdex would be 85; that is, the average of 90 and 80.

There is an appealing simplicity to the Comdex, but there are serious problems with it:

The Comdex can be based on ratings that are up to two weeks old. EbixExchange does not continuously update its ratings database, although it does have more frequent updates for large insurers. They told me that they are working on solving this problem, so it may be temporary.

The Comdex ignores the trend in the ratings. It takes a snapshot, and recent upgrades or downgrades don’t count.

The Comdex ignores the dispersion of the ratings. A company with a consensus of four ratings at the 80th percentile will have the same Comdex as a company with four wildly different assessments at the 95th, 85th, 75th and 65th percentiles.

The Comdex is an average of the percentiles for each rating agency, but the rating agencies do not rate the same companies. The Comdex creates an illusory single universe from the multiple universes of the components.

The Comdex suffers from false precision. The average of the rating agencies’ percentiles has a smoother distribution than the percentiles computed from each rating agency’s scale, but this reflects the mathematics of averaging rather than any additional information about the relative strength of the company. Small differences in the Comdex are meaningless, but it is always tempting to find meaning in differences.

So my bottom line is that it’s okay to look at the Comdex, but you need to look at the individual ratings as well. And perhaps a clever researcher will come up with a better alternative.

September 6, 2009 update

Here's an example from a client case today:

Pruco (AZ) Pruco (NJ)
AM Best A+ A+
Moody's A2 not rated
Fitch A+ A+
TheStreet C+ C+
Comdex 88 92

Both companies are part of the Prudential group. Is Pruco (NJ) stronger because it doesn't have a Moody's rating?