Understanding Annuity Company Ratings
Annuity company ratings are the opinions of the agencies that rate creditworthiness. The four largest credit rating agencies in the United States today are A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s. These four agencies rate the financial status of insurance and annuity companies. Financial status is based on several factors. Two that are considered the most important are the company's ability to meet its future financial obligations and its ability to manage risk it takes on when it issues policies.
Who are the Annuity Rating Agencies?
A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s all use proprietary, yet similar, calculations to rate annuity companies. Each also has written its own definition of a top tier credit rating. At A.M. Best the top credit rating is “A++, Superior”. At Standard and Poor’s, the highest rating is “AAA, Extremely Strong”.
How do investors compare the ratings? The best approach is to determine the top credit rating as it is assigned by each agency:
A.M. Best's highest annuity company rating is “A++ Superior”. This means the annuity company is “able to meet insurance obligations.”
Fitch awards an “AAA Extremely Strong” to the most stable annuity companies. This means that Fitch believes the company is “very unlikely to be affected by adverse market conditions”.
Moody’s Investor Services
“AAA Extremely Strong” is also the highest rating awarded by Moody's. However, Moody’s defines their rating differently than Fitch. Moody’s awards the rating when it determines that “Market conditions are unlikely to affect a fundamentally strong position”.
Standard and Poor’s
Part of The McGraw-Hill Companies, Standard and Poor's provides several services to the financial and investment communities, not the least of which is the S&P 500, the most widely known benchmark of large cap stocks. The best credit rating awarded by Standard and Poor’s is “AAA Extremely Strong”. They define this rating the same way Fitch does.
Even though these are the highest possible ratings awarded, it does not mean that a company that has a lower credit rating won't be able to meet the financial obligations it has. Ratings agencies review the stability of annuity companies periodically, so it is possible to have a small shift in ratings from one period to the next. Even a financially sound company that has been paying claims according to the terms of the policies for many years may not have the highest rating. Annuity investors, therefore, should always make sure that the company from which they purchase an annuity has at least one top tier rating. Annuities represent a long-term financial contract that could last for several decades. Permanent whole life insurance policies that are purchased as alternatives to annuities also create an obligation that lasts a number of years.
How Do These Agencies Determine Annuity Company Ratings?
Several factors are incorporated into the formula when the credit rating agencies determine annuity company ratings. History and timeliness of claim payments, the ability to raise capital and the amount of cash in reserve are all usually taken into account. And, balance sheet categories such as cash accounts, equities and bonds are compared against long-term obligations.
A major investment of most insurance and annuity companies is US Treasuries. Both treasury bonds and bills are kept in an insurance company's portfolio because they are considered the safest of all investments. In other words, regardless of what happens with the United States economy, the debt it sells as bonds and bills will be paid with interest on schedule. Investors may know that the credit rating of the United States as determined by Moody’s Investors Service is currently AAA.
Managing risk and debt obligations are just two of the factors used to determine whether or not an annuity company maintains its high credit ranking. The annuity company must balance the premiums it takes in each month to the amount it must pay out each month. This is particularly true for annuities products that guarantee an annuitant income for life. Annuity companies make use of actuarial tables that are slightly different than those used by life insurance companies. The annuity tables calculate the risk the company takes on when it sells the annuity contract.
The dollar amount of the premium that comes in and the amount that will need to be paid out are based on the age and gender of the annuitant, along with his or her life expectancy. The insurance company must ensure that at the very least it does not take in less in premium and earn less on its investments than it will over the life of the annuitant, including the cost of managing the contract. If an annuity company calculates this incorrectly, it will lose money. And if the investments do not provide additional revenue, the credit rating might be affected.
Which Insurance Companies Have High Annuity Company Ratings?
New York Life Insurance Company is the only insurance company in the United States to have earned the highest credit rating possible from each of the four major credit rating agencies at the same time. New York Life Insurance and Annuity Company, the division of the company that sells immediate and deferred annuities, offers several different annuity products for both individual investors and employer sponsored defined contribution plans.
Metropolitan Life (MetLife), Prudential, TIAA-CREF and Massachusetts Mutual Life Insurance Company have all also received the highest ratings from A.M. Best, Fitch, Moody’s and Standard and Poor’s. Each of these life insurance companies has demonstrated the ability to meet its financial obligations during good and bad economic times. These four companies show the least amount of risk for defaulting on their debt.
That is very important for annuity investors to remember. Annuity and life insurance contracts represent 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.
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