One of the primary considerations in choosing a variable or fixed annuity is establishing whether the annuity company is going to be able to meet its long-term commitments to you. Often the keys to this assessment are the past performance and current financial situation of the annuity company.
Several professional rating services, including A.M. Best Company, Moody’s Investors Service, Standard & Poor’s, Fitch, Inc., and Weiss Research, evaluate annuity companies and publish their findings on a regular basis. While not all insurance companies are rated, enough are to give you ample data on a wide range of choices.
Ratings Do Matter
Ratings are especially important when choosing a fixed annuity company, because your premiums go into the company’s general account. If the fixed annuity company has financial problems, you’re not insulated from the company’s potential losses because the general account is subject to claims by its creditors. So the more financially sound the fixed annuity company is, the more comfortable you can feel about purchasing a fixed annuity contract from it.
The same situation applies to the fixed account within variable annuities. That portion of your retirement savings is handled the same way as a fixed annuity. So ratings matter in the case of fixed accounts in variable annuities as well.
On the other hand, when you put money into any of the other portfolios of variable annuities, your principal goes into a separate account that is insulated from claims against the company (though not against the ups and downs of the underlying markets). The security of your assets in the separate account is subject to the risk and performance of the underlying investments in the portfolios and not the insurer’s financial strength.
So it may seem that ratings are less important since insurance ratings apply specifically to the insurance companies’ general accounts and not to the sub-accounts of variable annuities. But since you may be relying on the company to pay you a lifetime income, taking a company’s rating into account when choosing an annuity contract does make sense.
What They Rate
Each rating service has its own proprietary system for evaluating annuity companies and they generally focus on the following rating factors:
- Claims-paying ability, or the likelihood of the insurer’s making good on its insurance obligations
- Company strength, which is a measure of the company’s financial reserves stored up to pay out claims
- Financial history, which looks at whether the company has had problems with insolvency, or an inability to pay its own debts when they are due
- Soundness of the company’s general account investments
Where to Find Rating Services
You can get an overview of many of the annuity company rankings by scanning the websites of the various services. If you want to read the more detailed analysis, you can find copies of current rating reports in many local libraries or ask your financial planner or broker to provide the ones you want. Insurance companies will also provide a copy of a report if you request one.
In addition, you can contact the different services by telephone to request the information you want, though there may be a charge in some cases.
- A.M. Best. 908-439-2200. Click on “BestLine” to access ratings. $19.95 for Best’s Company Reports. $4.95 for a company rating. (www.ambest.com)
- Standard & Poor’s. 212-438-2400. No charge, five insurer ratings per call. (www.standardpoor.com)
- Fitch. 800-853-4824, ext. 199. No charge for rating. Company report costs $25. (www.fitchratings.com)
- Moody’s. 212-553-0377. No charge, four ratings reports per call. (www.moodys.com)
- Weiss Research. 800-289-9222. $15 per company over the phone. One-page written ratings available for $25 per company. A fuller 25-page company report costs $45. (www.weissratings.com)
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The information used to evaluate annuity companies comes in part from the public record and in part from the annuity companies themselves. Some of it is quantitative, based on mathematical computations that the rating services have devised and some is qualitative, based on an assessment of management style, investment strategy, and other factors.
What the Grades Mean
Each service assigns a rating to each insurance company it evaluates, typically as a letter grade. The oldest rating service, A.M. Best, measures a company’s relative financial strength and its ability to meet its obligations with ratings that range from the high of A++ to the low of C–.
Other services, like Standard & Poor’s and Fitch, which assess claims-paying ability, use a rating system similar to those used for rating bonds, which is also based on letter codes. For these two providers, a superior rating is AAA, and the lowest acceptable is B–. Moody’s, which measures financial strength and the company’s ability to pay, uses a different style, with the highest rating being Aaa and the lowest B3.
In general, a company ranked excellent by one rating service is likely to receive a similar, though not necessarily identical, ranking from another. That’s because the rating services use somewhat different criteria in making their assessments. So it’s generally a good idea to look at the ratings from at least two of the services when you are comparing annuity companies.