Why Check a Company’s Financial Strength Ratings?
When choosing an annuity provider, it’s essential to have clear and concise information about the company you’re signing a contract with. The five U.S. credit rating agencies, including AM Best and S&P Global, exist to provide transparency to consumers and promote integrity among annuity providers. Each insurance rating agency creates its own independent rating scale.
Key Takeaways About Credit Ratings
- In the U.S., five credit rating agencies assess insurers’ financial strength, including AM Best, Fitch, Moody’s and S&P Global. Each agency has its own rating standards.
- State and federal regulators closely monitor these credit rating agencies.
- Be cautious of annuity companies publicizing only their highest ratings.
While these agencies don’t recommend specific products, their assessments and official ratings can influence annuity purchase decisions. State and federal regulators closely watch these agencies to ensure consumer protection.
Credit Rating Agency Regulation
The Credit Rating Agency Reform Act of 2006 regulates these agencies. The Act aims to improve rating quality and protect investors.
At the federal level, the Dodd-Frank Wall Street Reform and Consumer Protection Act created the U.S. Securities and Exchange Commission’s Office of Credit Ratings to ensure the public gets accurate credit ratings.
To address state-by-state annuity regulation, the National Council of Insurance Legislators created the Model Act to Support State Regulation of Insurance by Requiring Competition Among Rating Agencies.
The Act aims to promote competition among insurer ratings to benefit consumers, licensed insurance companies, producers and other stakeholders. They achieved this by incorporating the requirements for multiple competent insurer rating organizations into laws and regulations.
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Annuity Company Rating Agencies
Five credit rating agencies assess the financial strength of insurance companies — AM Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and S&P Global. Each agency has its own criteria and rating system, which may include minor variations in rating.
Credit rating agencies do not recommend any particular annuity product, but they do assess an insurance company’s financial stability. This is important to consider when deciding whether to purchase an annuity from that carrier.
It’s worth noting that these agencies may have differing opinions on a company’s rating, so it’s wise to consider ratings from multiple agencies before making a decision. Remember that ratings can change anytime, so check the ratings of any company you’re interested in annually.
High annuity company ratings are important, but it is important to note that there are some very good annuities sold that are B++. I have had many clients come to me looking for a higher rate of return offered by a B++ rated company versus an A rated company, and in some instances the lower rating is not a problem because they are investing less than the state insured amount. This can offer peace of mind when looking at company ratings, but still wanting to get the highest rate of return.
John Stevenson, CFFOwner and Advisor at Stevenson Retirement SolutionsJohn Stevenson, a Certified Financial Fiduciary®️, specializes in securing retirements with tax-free accounts. With a focus on guaranteed retirement, he’s ensured none of his clients suffer from market fluctuations. As a renowned educator and podcast host, John empowers thousands weekly, sharing his expertise in minimizing taxes and protecting against financial downturns.
AM Best Rating Services
AM Best analyzes the trustworthiness and dependability of over 16,000 global insurance companies. It bases its Financial Strength Rating system on the ability of these companies to pay claims and debts on time.
These ratings — Ranging from A++ (Superior) to D- (Poor) — reflect AM Best’s evaluation of an insurance company’s financial proficiency.
When it comes to evaluating the financial wherewithal of an insurance company, AM Best is king of the rating agencies. For conservative individuals, the safest insurers are rated A- and above. B-rated insurers can offer compelling return potential, but they are less financially secure than top-tier companies. Avoid establishing a contract with a life insurance company rated below B+.
Additionally, AM Best shares its research, findings and news to offer industry professionals and consumers a better understanding of the insurance industry.
S&P Global Ratings
S&P Global, previously Standard and Poor’s, has been rating insurance companies since the 1980s. It evaluates an insurance company’s claims-paying ability based on industry-specific risk, management factors, operating performance and capitalization.
S&P Global’s insurer financial strength ratings range from AAA (Extremely Strong) to D (Default) with plus and minus qualifiers.
The S&P 500 stock market index is S&P Global’s most popular product and is widely used as the basis for various investments.
Moody’s Investor Service
Moody’s is a global risk assessment firm that provides credit ratings to investors for different entities like corporations, governments and securities.
The Insurance Financial Strength Rating (IFSR) from Moody’s measures an insurance company’s financial strength compared with other rated insurance companies worldwide. The ratings are assigned on a scale ranging from Aaa (Exceptional) to C (Extremely Poor).
Fitch Ratings
Fitch uses a credit rating system to assess the risk of an insurance company’s default. The ratings range from ‘AAA’ to ‘BBB’ for low-to-moderate credit risk and ‘BB’ to ‘D’ for higher credit risk or companies in default.
The company assigns credit ratings to insurance organizations to offer independent, forward-looking opinions and research. Its credit ratings indicate relative risk and cannot predict default frequency, according to the Fitch website.
Kroll Bond Rating Agency
The insurance financial strength rating issued by the Kroll Bond Rating Agency (KBRA) is specifically for insurance operating companies. It assesses a company’s overall financial health and ability to meet policyholder obligations.
The ratings range from AAA (Extremely Strong) down to R for companies under regulatory supervision.
Annuity Carrier Ratings
As of 2023, IBISWorld, an industry research firm, reports that there are 673 life insurance and annuity providers in the United States. This number has increased by 1.6% each year from 2018 to 2023.
This table provides a sample of company ratings from three leading credit rating agencies.
Select Ratings and Annuity Carriers, 2024
Source: AM Best, S&P Global and Moody’s. Subject to change.
*Not rated by this rating agency
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What Do Financial Strength Ratings Mean?
When looking at insurance company and annuity carrier ratings, don’t just rely on what the annuity company cites as its rating. The carrier might only show the highest rating it received from one rating agency and ignore lower ratings from other agencies.
Also, keep in mind that each agency has its own rating system.
For example, an A+ rating from AM Best is one of the highest out of 13 possible ratings. But an A+ from Fitch, Kroll or S&P might be lower because it’s only within their top five ratings in multiple categories. Also, remember that Moody’s doesn’t have an A+ rating.
Even with these differences, you can still group ratings into mega-categories of “secure” and “vulnerable,” according to the Insurance Information Institute.
