Annuities, Part 2: Insurer Financial Strength Ratings

Annuities are a very popular investment. According to the Life Insurance Marketing and Research Association (LIMRA), there were about $234 billion in annuity sales last year (2018) alone. Whether you love them or hate them, they aren’t going away any time soon. 

Because they are so popular, I wanted to do some research so I could better answer the question “If I have decided I want an annuity, how do I choose which annuity to purchase?”

An obvious starting point was to figure out how to compare the stability of various annuity providers. Insurance companies are the primary providers of annuities, and thus the financial stability of these annuity companies should be an important (but not the only) factor in your decision.

In this article, I’ll cover:

  • How do you measure the stability of an insurance company?
  • Where can you find IFS Ratings?
  • How do you compare the stability of one insurance company to another?

Let’s get to it.

How do you measure the stability of an insurance company?

You can imagine that analyzing the financial stability of massive insurance companies is no easy task. To do so accurately, you’d have to analyze dozens of variables. It sounds like a full-time job. As I found out, not only is it a full-time job, but there is an entire industry that has been built to do just this.

Companies called Credit Reporting Agencies (CRAs) main job is to analyze the stability of various other companies across the globe. When it comes to analyzing insurance companies, there are 4 main CRAs in town. In no particular order, those are:

  1. A.M. Best
  2. Fitch Group
  3. Moody’s
  4. Standard & Poor’s

These companies issue something called an Insurer Financial Strength (IFS) Rating. One CRA describes an IFS Rating as “forward-looking opinions about the financial security characteristics of an insurance organization with respect to its ability to pay under its insurance policies and contracts in accordance with their terms.

Consumers can use these IFS Ratings as part of their analysis when measuring the financial stability of an insurance company with which they are considering doing business.

What do IFS Ratings look like?

Sounds easy, right? Not so fast. Although they likely look at similar data in making their decision, each CRA has its own proprietary process for how it analyzes a company. Each CRA also has its own scoring model. If you want, you can read more about each company’s scoring model (A.M. Best, Fitch Group, Moody’s and Standard & Poor’s). Below is a table of each CRA’s scoring model. As you can see, they are all similar, but not identical.

The same rating from different CRAs may mean something very different. For example, an IFS Rating of “B+” from A.M. Best is the 6th highest out of 13 possible ratings. Pretty middle-of-the-pack. But a “B+” from Fitch is the 14th highest out of 19. Relatively speaking, that is much lower down the ranking scale. 

When comparing the IFS Ratings of different companies, you should make sure that you are comparing apples-to-apples. In other words, make sure you are comparing the IFS Rating from the same CRA.

Where can you find IFS Ratings?

Now that I knew what an IFS Rating is, it was time to compare some insurance companies. I limited my research to the top 20 annuity issuers in the US, since these are the most likely companies for you to choose from, but you should be able to do this for any insurance company you are considering. Together, these 20 insurance companies are responsible for about $176 billion in annuity sales, which is 75% of all annuity sales in the country!

Luckily, every single one of the top 20 insurance companies make their IFS Rating publicly available, since they know consumers use it when shopping around. To make things easy, below are links directly to each company’s specific website page that lists their IFS Ratings.

  1. AIG
  2. Jackson
  3. New York Life
  4. Lincoln
  5. Allianz
  6. AXA
  7. TIAA
  8. Nationwide
  9. Pacific Life
  10. Prudential
  11. Global Atlantic
  12. Athene
  13. Mass Mutual
  14. Great American
  15. Brighthouse
  16. RiverSource
  17. American Equity
  18. Principal
  19. Symetra
  20. Transamerica

Below is a table of the top 20 companies in order of annuity sales volume (largest at the top, and getting smaller as you work your way down). Next to each company are the IFS ratings listed on their website. Note, that not every insurance company displays the IFS rating from all 4 CRAs. If a company did not display a rating from one of the CRAs, that cell is blacked out.

How do various insurance companies stack up

I now had all the information in 1 place, but it just looked like an alphabet soup and was still difficult to compare 1 company to another. To make things easier, I tried to normalize the ratings across the 4 CRAs by converting all the IFS Rating to percentages. 

For example, the top IFS Rating from each CRA equaled 100%. Since A.M. Best has 13 possible rankings, the 2nd highest ranking would equal 92%. 3rd highest, 85%. And so on. However, for Fitch, which has a total of 19 possible rankings, the 2nd highest would equal 95%. 3rd highest, 89%. And so on. Below is the same table as above, but with the actual rankings replaced with my percentage rankings.

I then calculated an equal-weighted average percentage for each company, which gave me just 1 number I could focus on. Below is a table of the same 20 companies, but this time they are ranked from the highest financial strength percentage to the lowest financial strength percentage.Notably, I did not penalize an insurance company for not having an IFS Rating from all 4 CRAs. You could also argue that some CRAs are more credible than others, and thus their IFS Ratings should be more highly weighted, while I just took a simple average. I’ll point out that I felt comfortable taking a simple average because independent research by EY did conclude that “there appears to be strong consistency in the evaluation of the insurers by the agencies.”

I’m not saying my method is the most robust, but I’m willing to bet it is more thorough than the research most consumers do. If you disagree with the methods I used, I encourage you to do your own research.

Notably, even the lowest companies on this list are still considered to be in “Good,” “Strong” or “Excellent” health. So being low on this list still means you are in good shape. They just are not as healthy as the companies on the top of the list who are considered to be in “Superior,” “Exceptionally Strong,” “Very Strong” and “Exceptional” health.

Conclusion

It’s helpful to know that this type of scoring exists and is easily-accessible. I was able to get all of this information, for free, from each of the 20 insurance company’s websites that I analyzed. It’s also helpful to know that you should look at the IFS Rating from multiple CRAs, if possible. 

Of course, this shouldn’t be the only factor you use when choosing from whom to purchase your annuity, but it is arguably a very important one. I hope this was helpful.

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