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Class 3-6 bonds get their name as a result of their bond classification, which is determined by their investment grade. These bonds are classified as non-investment grade for the purposes of life insurance companies' fixed-income portfolios in their general fund. Classes 1 and 2 are considered investment grade.

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The National Association of Insurance Commissioners (NAIC), the standard-setting regulatory body governed by state insurance regulators, divides bonds into different classes based on their investment grade. Classes 1 and 2 are considered investment-grade bonds, which are the least risky, or the least likely to go into default. Classes 3 through 6 are considered non-investment grade bonds; they are considered a low-quality investment because the issuer may default. Class 6 bonds are the most risky type of bonds to invest in.

National Association of Insurance Commissioners. "NAIC Publicly Traded Securities Listing Definitions," Pages 2-3. Accessed August 25, 2021.

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By evaluating the classes of bonds an insurance company invests in, investors can gain an understanding for the risks a company may face if the number of claims it receives increases. If an insurance company is unable to meet its obligations it may be deemed an impaired insurer, and if it is unable to improve its finances when impaired it may ultimately go bankrupt.

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A non-investment grade bond carries a rating that signifies a higher level of risk, or the likelihood that the bond issuer will go into default. Credit ratings are extremely important because they convey the risk associated with buying a certain bond.

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Class 3-6 bonds are one of several classes of non-investment grade bonds held by an insurance company as reserves. Class 3-6 bonds are considered to be the most risky type of bonds issued by insurance regulators and are more likely to go into default.

Analysts use a variety of ratios to determine the viability of an insurance company. A basic analysis can include a review of the percentage of each bond class compared to the company's total bonds. Robust bond portfolios carry less risk; they will have more Class 1 and Class 2 bonds.

There are many types of bonds that can be classified in the Class 3 through 6 bond range. For example, bonds that are at or near their default limit are considered Class 6 bonds and carry a high amount of risk.

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Steuer, Anthony. (2017). Questions and Answers on Life Insurance: The Life Insurance Toolbook. P. 109.  iUniverse Star Publishing.

This ratio shows the proportion of a company’s bond portfolio at a greater risk for default and nonperformance compared to all bonds.