Understanding Ratings for Annuity Companies

• Posted By : Braden MacDonald
• annuities, fixed annuities, annuity basics

Overview of Rating System for Annuity Carriers

Annuity companies receive rating assessments from 3rd party agencies on the creditworthiness and strength of the company. There are four large credit rating agencies that the insurance companies usually turn to for their ratings.

They are A.M. Best, Fitch, Moody's Investors Services and Standard and Poor's. An insurance company will commission one or more of these four agencies to rate their financial status. The financial rating is determined by several factors. The company's ability to meet its future financial obligations, it cash reserve, and the companies ability to manage risk when issuing policies are considered the most important of those factors.

Annuity Rating Agencies:

As stated above, there are four main rating agencies, (A.M. Best, Fitch, Moody's Investors Services and Standard and Poor's). While they do use similar methods and calculations to determine an annuity companies rating, they all use proprietary systems unique to the specific rating agency. In additions to using different methods for determining the rating, each agency also has it's own grading system. For example, the top "grade" for S & P is AAA - Extremely Strong, while at A.M. Best the top grade rating is A++, Superior.

Breakdown of Ratings Example

A.M. Best

A.M. Best ratings (A++ to F) are assigned to insurance companies that subscribe to their interactive rating service. The Best's Rating represents and opinion based on a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile.

• A++ and A+ (Superior) Assigned to companies that have, in our opinion, a superior ability to meet their ongoing obligations to policyholders.
• A and A- (Excellent) Assigned to companies that have, in our opinion, an excellent ability to meet their ongoing obligations to policyholders.
• B++ and B+ (Very Good) Assigned to companies that have, in our opinion, a good ability to meet their ongoing obligations to policyholders
• B and B- (Fair) Assigned to companies that have, in our opinion, a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions.
• C++ and C+ (Marginal) Assigned to companies that have, in our opinion, a marginal ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions.
• C and C- (Weak) Assigned to companies that have, in our opinion, a weak ability to meet their current obligations to policyholders, but are financially very vulnerable to adverse changes in underwriting and economic conditions.
• D (Poor) Assigned to companies that, in our opinion, may not have an ability to meet their current obligations to policyholders and are financially extremely vulnerable to adverse changes in underwriting and economic conditions.
• E (Under Regulatory Supervision) Assigned to companies (and possibly their subsidiaries/affiliates) that have been placed by an insurance regulatory authority under a significant form of supervision, control or restraint, whereby they are no longer allowed to conduct normal ongoing insurance operations.
• F (In Liquidation) Assigned to companies that have been placed under an order of liquidation by a court of law or whose owners have voluntarily agreed to liquidate the company.
• S (Rating Suspended) Assigned to rated companies that have experienced sudden and significant events affecting their balance sheet strength or operating performance whose rating implications cannot be evaluated due to a lack of timely or adequate information.

How Are the Ratings for an Annuity Company Calculated?

There are several factors taken into account when formulating the credit rating for the specific annuity carrier. The amount of cash in reserve held by a company, the history and timeliness of claim payments, and the ability to raise funds are all usually all factored in. And, balance sheet categories such as cash accounts, equities and bonds are compared against long-term obligations.

An insurance company makes a profits by reinvesting the funds it receives from selling an annuity. In order to ensure the money invested will be safe, the vast majority investment by most insurance and annuity companies is in US Treasuries. Both treasury bonds and bills are among the safest investments a company can make. Even when the markets or economy sours, the debt the US sells as bonds and bills will be paid with interest on schedule.

While debt obligation and managing risk are important factors when determining an annuity companies rating, they are not the only things a rating agency will look at. The annuity company needs to find a balance between premiums it takes in each month to the amount it must pay back each month to it's policy holders. 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.

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