An annuity is a long-term financial contract, and permanent whole life insurance purchased as an alternative to annuities is also a commitment that could last for several years. Investors who wish to make a good decision can help themselves choose well by consulting annuity rating agencies in order to make an informed buying decision.
Annuity Rating Agencies
An annuity rating agency assigns ratings to insurance and annuity companies based on their opinion of how the company performs. In the United States, there are four major annuity rating agencies. These rating agencies include A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s. Each agency uses different though similar methods and calculations to determine ratings and each agency uses different terms within its rating system. An “A+” means different things depending on which agency is assigning the “A+” rating, and some agencies do not have an “A+” rating at all, so the ratings do not correlate directly by name. The best strategy for investors is to compare ratings among the four agencies and focus on companies who have received top-tier ratings.
Top-Tier Ratings Comparison
For example, A.M. Best’s top rating is “A++ Superior”, and it is assigned to companies that have, in A.M. Best’s opinion, “a superior ability to meet their ongoing insurance obligations.” Fitch’s top rating is “AAA Extremely Strong”, and denotes that Fitch believes the company “very unlikely to be affected by adverse market conditions”.
Moody’s Investor Service’s top rating is also “AAA Extremely Strong” but Moody’s rating signifies that “market conditions are unlikely to affect a fundamentally strong position”. And Standard and Poor’s, the same company responsible for the S&P 500, also uses “AAA Extremely Strong” as their top rating. They use it to mean just what Fitch does, that a company is “very unlikely to be affected by adverse market conditions.”
How Annuity Company Ratings are Determined by Annuity Ratings Agencies
Different annuity ratings agencies use different systems to compile their ratings, and ratings agencies revisit companies periodically to review the rating. The standard reassessment occurs yearly, though a company can be reassessed more frequently, based on performance. Therefore, a company’s rating may shift from one period to the next, and a company with a rating lower than the top tier with one of the four agencies may also be able to meet its financial obligations. Investors should ensure that the company from which they are purchasing an annuity is rated in the top tier by at least one of the above agencies.
An annuity or life insurance contract represents a debt to an insurance company that must be paid at some point in the future. A life insurance company’s ability to manage debt is one of the most important keys to getting and maintaining a high credit rating.
Many variables are part of an annuity rating agency’s decision of determination regarding credit ratings, but an annuity ratings agency bases its rating, in most basic terms, on a company’s ability to meet its financial obligations. Balance sheet categories including cash accounts, equities and bonds are all compared against long-term obligations. The ratings agency reviews the company’s history and track record including the timeliness of claim payments.
Another important factor used to determine whether or not an annuity company maintains its high credit ranking is the company’s ability to manage risk. In order to manage risk, the company uses actuarial tables that calculate the risk involved in selling the annuity contract compared to the costs. Especially in regards to annuity products that guarantee an annuitant income for life, each month’s premiums must balance to the amount paid out. The amount that will need to be paid out is based on the age, gender and life expectancy of the annuitant. Including the cost of managing the contract, the insurance company has to be sure that at the very least it does not take in less in premiums and earn less on its investments than it will over the life of the annuitant. An incorrect calculation by the annuity company results in the company losing money and poor results for the company can affect the company’s credit rating.
As an example of a top-tier rating by Moody’s Investors Service, Moody’s rates investing in US Treasuries as AAA, because regardless of fluctuations in the United States economy, US bonds and bills will be paid with interest and on schedule. Because of this dependability, treasury bonds and bills are considered the safest of all investments and most insurance and annuity companies keep them in their portfolio and invest in them heavily.