Life insurer financial distress, best's ratings and financial ratios

This study compares the predictive ability of: (1) ratings, rating changes and total assets; (2) financial ratios; and (3) financial ratios combined with ratings and rating changes on a sample of forty-eight insolvent life insurers over the period 1990 to 1992. Based on the expected cost of misclassification, ratings, rating changes and total assets have comparable predictive ability to financial ratios combined with ratings and rating changes. However, combining ratings and rating changes with financial ratios improves predictive ability compared to financial ratios alone for most cost ratios. Another interesting finding is that adverse rating changes are important predictors of insolvency.