What Are Annuity Ratings?
Annuity ratings are the opinions of credit rating agencies. The four main credit rating agencies in the United States are A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s. Each of these four agencies rates the financial stability of insurance and annuity companies. Financial stability is based on many factors, but two of the most important are the ability of a company to meet is future financial obligations and its ability to manage risk.
Who Awards Annuity Ratings?
A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s each use different, albeit similar, formulas to rate insurance and annuity companies. And, each provides its own definition of a top credit rating. For example, the top rating at A.M. Best is “A++, Superior” while the top rating at Standard and Poor’s is “AAA, Extremely Strong”. So how does an investor compare the ratings? First and foremost, find out the top credit rating assigned by each agency. They are as follows:
The highest credit rating assigned by A.M. Best is “A++ Superior”. This means the annuity company is “able to meet insurance obligations.”
The highest credit rating awarded by Fitch is “AAA Extremely Strong”. This rating means Fitch believes the company is “very unlikely to be affected by adverse market conditions”.
Moody’s Investor Services
Moody’s highest rating is also “AAA Extremely Strong”. But note that Moody’s defines this differently than Fitch: Moody’s assigns this rating when it feels that “Market conditions are unlikely to affect a fundamentally strong position”.
Standard and Poor’s
Standard and Poor’s is part of The McGraw-Hill Companies. They provide a number of services to the financial and investment community, including the most widely used benchmark of large capitalization stocks, the S&P 500. The highest credit rating assigned by Standard and Poor’s is also “AAA Extremely Strong” and they define this in the same way as Fitch.
While these are the highest ratings assigned by each agency, it does not mean that a company with a lower rating will not be able to meet its financial obligations. As ratings agencies periodically review the creditworthiness of insurance and annuity companies, it is possible that there could be a small shift in a rating from one period to the next. Even financially sound companies that have been paying claims on time and according to the terms of the policies for years may not have the highest ratings due to any number of factors.
Investors, however, are always advised to make sure that the insurance company from which they buy any annuity has at least a top tier rating. An annuity represents a long-term contract that could last for 10, 20, 30 or more years. Whole life insurance policies, which are sometimes purchased as an alternative to an annuity, can also stretch out over a number of years.
How Are Annuity Ratings Determined?
A number of factors are considered when determining annuity ratings. Claim payment history, ability to raise capital and cash reserves are all taken into account. Further, balance sheet items such as money market accounts, stocks and bonds are judged against long-term obligations.
One major investment holding of most insurance and annuity companies is United States Treasuries. Both bonds and bills are kept in a portfolio because they are considered to be the safest of all investments. It is understood that no matter what happens in the United States, the debt it sells in the form of bonds and bills will be paid. Investors may be aware that the current credit rating of the United States as determined by Moody’s Investors Service is AAA, although there are some who feel this rating is in jeopardy due to an increasingly large budget deficit.
Managing risk and debt obligation are two important ways of determining whether or not an annuity company will be able to maintain a high ranking. For example, the annuity company has to balance the amount of premium it takes in to the amount it pays out each month, particularly annuities that guarantee income for life. Annuity companies use annuity actuarial tables that differ slightly from life insurance actuarial tables. The tables calculate the risk the annuity company takes on when it issues the annuity contract. The amount of the premium and the amount paid out are based on the age of the annuitant and his or her life expectancy.
The insurance company needs to make sure that at the very least it does not take in less in premium than it will pay our over the annuitant’s life, including the fees it charges to manage the contract. If the annuity company underestimates this calculation, it will lose money over time. In addition, if its investments do not offset the loss or provide additional revenue, its credit rating will be affected.
Five Companies with High Annuity Ratings
New York Life Insurance Company is one of the oldest and most stable life insurance companies in the United States. It is the only insurance company in the country to have the highest credit rating from each of the four primary rating agencies at the same time. New York Life Insurance and Annuity Company, the subsidiary that sells annuities, offers a number of different annuities for individual investors and corporate defined contribution plans.
In addition to New York Life, Metropolitan Life (MetLife), Prudential, TIAA-CREF and Massachusetts Mutual Life Insurance Company all receive top ratings from each A.M. Best, Fitch, Moody’s and Standard and Poor’s. Each of these companies has demonstrated an ability to meet the financial demands of its clients during both good and bad economic cycles. These companies show the least amount of risk for default on debt.
And that is what is important for investors to remember. Annuity and life insurance contracts represent debt to an insurance company. A company’s ability to manage that debt is the key to its high rating. Just as an individual’s ability to handle debt is reflected in his or her credit score, so is a life insurance company’s in its credit rating.
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