Annuity Companies: Corporate Credit

Analyzing the financial strength of a financial institution is the final critical component of your annuity investment process. The four major independent ratings agencies are:

  • A.M. Best
  • Standard & Poors
  • Moody’s
  • Fitch

All of these agencies are online and you can find the strength rating they have assigned to each insurance company.  It is recommended to look at information from all four agencies to make sure there is a consensus in relation to the company you are researching.  If there is not, you need to find out why! The credit rating of a financial institution is just like a credit score for an individual.  If you want a loan from a bank, they will assess your ability to repay that loan.  In regards to annuities, you are loaning your money to the company so you should assess their ability to meet the terms they agree to. The approach to insurance company analysis used by these agencies is similar but no two agencies are alike.  Therefore, finding ratings from multiple agencies and not simply taking the one supplied by the Insurance company itself is critical. Since this is not the most exciting section, let’s keep it simple and just focus on the ratings from Standard & Poors.  Before we continue I will stress one more time the importance of getting information from as many agencies as possible. S & P divides all classifications into two major categories. The highest tier of B rated companies and all A rated companies are considered ‘investment grade’.  The middle and lower tiers of B rated companies all the way down to D rated companies are considered to be ‘speculative grade’.  The entire list of S & P ratings is as follows:

AAA : Superior ability to meet obligations
AA : Very strong ability to meet obligations
A : Strong ability to meet obligations
BBB : Adequate ability to meet obligations
BBB -: Lowest rated investment grade companies
BB+ : Highest speculative grade companies
BB : Not vulnerable in the short-term but faces long-term challenges
B : More vulnerable to adverse business and economic conditions
CCC : Currently vulnerable and dependant on favorable business and economic conditions
CC : Highly vulnerable currently
C : Some form of bankruptcy action has been taken but current obligations have been met
D : Defaulted on payment of obligations

Investment grade companies are preferred since they will offer the highest levels of safety. Because of the quality of these companies, they expect to get a better deal when they borrow money. What’s that mean? You should expect lower investment returns from these companies in exchange for the higher levels of safety their superior credit offers. Now, that’s not all bad news from the perspective of yields.  The most stable companies do offer some of the lower interest rates on fixed annuities, but good research can still uncover your goal:

A Strong Company AND A Good Interest Rate.

As these rates and corporate credit ratings are always changing, be sure to Contact Us for an Annuity Expert to help you find the best of the best Speculative grade companies should be avoided during annuity consideration.  The chances are good that even speculative grade companies can meet their obligations, but they offer practically no benefits in terms of rate for the increased risk you assume Why gamble for a minimal increase with your nest egg? Consider your safety and cast these companies aside. 

If you wish to dig deeper into the analysis of credit ratings, you must look at any recent changes to the rating assigned to a company.  With the financial catastrophe that has hit the global credit markets over the past year, many companies have seen a change in the ratings assigned by the various agencies.  The ratings agencies will offer free information on whether a company has been upgraded, downgraded or left unchanged.

The ratings agency will also give their opinion on the future outlook of the company.  This is usually listed as positive, stable or negative.  Any information related to a negative outlook deserves closer scrutiny. Companies with significant exposure to real estate and sub-prime credit markets have been damaged.  These weak or non-performing assets have caused many companies to pledge cash reserves to back the bad assets or seek new loans that load the company with more debt.  Non-performing assets mean less profit to the company.  More debt brings on more obligations to the company.

Even with less profit and more debt, many battered companies may be safe in the long run.  Companies like AIG saw a great deal of stress on their portfolios of assets due to bad bets.  Many advisors churned clients out of AIG annuities and into new products.  This is rarely in the YOUR best interest, however. Even with our current financial crisis, however, there are plenty of good companies that have avoided the risk altogether and are sitting in a very stable position. Identify the stable companies and you find the ones most deserving of your business.

At Annuity Straight Talk, we can connect you with an Annuity Expert to help you select the best companies and products, and do the heavy lifting to research the best credit rating.  Please Contact Us .

Action Items:

Investigate the Credit Rating of the Insurance Company you are considering from Multiple agencies
Don’t blindly accept the rating supplied by the Company as ratings vary between rating agencies
Pick the highest possible rating you can find without compromising your interest rate or other critical factors

Written By

Bryan Anderson

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