How to Assess the Financial Strength of an Insurance Company
When you buy an annuity, you are more than likely doing so with the intention of receiving a stream of income. You may want that income to start immediately or you may wait several years. You may want it to continue for the rest of your life or just for a set number of years.
So how do you know the insurance company can keep that promise? How can the insurer “guarantee” it will pay your income stream?
While nothing is 100 percent certain, you can increase the chances of picking the right insurance company by reviewing independent financial ratings of annuity providers.
Insurance companies are rated for their financial strength by one or more of four independent rating agencies: A.M. Best, Fitch, Moody’s and Standard & Poor’s. These agencies assess an insurer’s ability to meet its current and future obligations and issue letter grades for each company they cover. The higher a company’s rating, the greater the likelihood the rating agency believes it can meet its current and future obligations.
The value of these ratings is that they come from an impartial third party. These agencies do their own investigating into the financial health of insurance companies and use their own formulas and to form an opinion. Some of the criteria rating agencies use are company profit and revenues, what it has in reserve, how it’s investing premium dollars, how much it collects in premium versus how much it pays out in claims and annuity payments, and the overall state of the economy.
It’s important to understand that the information you receive from a rating agency is just an opinion. You should also keep in mind that these assessments have nothing to do with whether these companies are good investments; just their ability to meet their obligations.
Each agency has its own rating scale and rating standards. Therefore, a grade given by one agency may not mean the same thing as a similar grade given by another. For example, an A+ rating from A.M. Best translates to excellent financial strength, while an A+ from Moody’s denotes good financial strength. The top ratings given by each agency are:
- M. Best: A++, A+, A, A-
- Fitch AAA, AA+, AA, AA-, A+, A, A-
- Moody’s: Aaa, Aa1, Aa2, Aa3, A1, A2, A3
- Standard & Poor’s: AAA, AA+, AA, AA-, A+, A, A-
The agencies disagree often enough that you should consider an insurer’s rating from two or more agencies before judging whether to buy or keep an annuity from that company. One thing that is consistent among the four is that the best ratings begin with A. Therefore, you should try to limit your purchases to companies with ratings that begin with A. B ratings are adequate, but those companies are not as financially strong as those with As. Companies with ratings that begin with C, D, or F should be avoided as they are considered financially weak.
You can usually receive financial ratings for free on each agency website. Insurance companies also post their ratings on their websites or printed marketing materials. You can call the insurers to get that information or ask your agent.
Additional considerations when reviewing an insurer’s financial ratings include:
- In addition to reviewing a company’s current rating, look for trends in rating movements. For example, a company that has maintained high ratings for decades is likely a stable, well managed company that you can trust with your money. On the other hand, a company that’s been recently downgraded might raise red flags.
- Make sure you find the ratings for the company that will issue your annuity policy, not a subsidiary or parent company. The policy issuer is the entity that is legally obligated to pay on your annuity contract. Some insurance companies are part of larger umbrella groups that may have separate financial ratings.
- If you currently own an annuity and the issuing company is sold or merges with another company, you should check the financial rating of the new company.