Insurance Company Ratings
Do fixed annuity insurer ratings accurately reflect the true financial strength of the insurer? The question has been circulating in the wake of the financial downturn of 2008 and agents are looking for answers.
To find out, Advantage Compendium looked to the historical record for some insight. The answer that the St. Louis consulting and research firm has uncovered is not what many would have had expected, based on today’s prevailing economic uncertainty and the generalized antagonism toward rating companies in general.
Rating agencies have “missed” some insolvencies in the past, allows Jack Marrion, president of Advantage Compendium. But their track record has improved in the past 15 or so years to the point where he believes that their overall performance is positive.
That’s important for agents to know, especially now that rating agencies are coming out with new rating actions for 2012, and some are downgrades.
People want to know how safe fixed annuity carriers are, says Marrion. The conclusion he has reached has become the title of a new report from his firm: “The Fixed Annuity Industry Is Not Going to Fail.”
From 1986 through 1994, the report points out, roughly 45 percent of annuity carriers that failed had been rated “excellent” by A.M. Best three years before the state took them over. However, less than a year before state regulators declared them insolvent, just 25 percent of the failed carriers were still rated “good” or “excellent,” Marrion says.
The track record is even better in the years since 1995.
Since that time, he says, only 10 annuity carriers have been taken over, and only one was rated “excellent” three years before the state took action. “In addition, none (of the 10 annuity carriers) were in this category a year before the action occurred.”
What does this mean for agents who see a rating downgrade on a company they represent now?
“Based on the historical data, the odds of failure are incredibly slim if a company is rated excellent,” Marrion tells InsuranceNewsNet. “The odds of failure are also slim if a carrier is rated “good.”
However, he cautions, if the company rating has been lowered, the agent should check with the other rating agencies to see if comparable actions have been taken on that company.”
In general, a rating downgrade should be used as a flag to check around to find out the reason, Marrion continues.
“Remember, it’s not a bad thing if a downgrade is slight and the company is still rated good or better. In fact, it could be a good thing, because you want a rating service to reflect the economic realities, harsh though they may be. The annuity contract is a long-term promise. You want to know what you are promising and the likelihood of that promise being kept.”
A rating is supposed to reflect the risk of default, and the ratings do that, Marrion stresses.
In general, he says, the data show that the lower-rated companies are the ones that have the greater chance of failure. “However,” he reiterates, “historically speaking, very few annuity companies that are rated ‘good,’ ‘excellent,’ or ‘superior’ have failed.”
For that reason, he says, the decision of whether to use a company that has had a rating downgrade will rest with the expertise of the agent.
Marrion says his research includes analysis of rating agency actions along with data from the National Organization of Life & Health Insurance Guaranty Associations and other regulatory bodies and resources. Some additional findings include the following: Between 1986 and 2011, an estimated 152 life and health carriers went into receivership. Most were smaller companies, and they tended to have either bad ratings or no ratings from rating agencies, although there were some “notable” exceptions, especially before 1995.Of the 152 filed insurers, 31 carriers sold annuities:
- Of the 31 failed annuity carriers, 14 were rated C++ or below or had no letter rating at all, but six were rated A- or above over two years prior to state action.
- Of the 31 failed annuity carriers, 13 had assets of under $100 million, but 11 had assets over $1 billion.
- Twenty-one of the 31 annuity carrier insolvencies occurred before 1995.
- Of the 21 failed annuity carriers, nine were rated in “excellent” financial condition three years before the state took them over, and five were rated “good” or “excellent” by A.M. Best less than a year before the state action.
The reason for the record number of annuity carrier insolvencies 20 years ago was due to a failure to appreciate that the world had changed, Marrion points out in his study. “A rating service could visit a carrier’s financials once a year back then and still be relevant because insurance companies simply didn’t move that fast.”
However, by the late 1980s, carriers were moving into products and markets with which they were unfamiliar, and 5 percent of life and health carriers ended up failing within a three-year period.
Regulators and rating services have become more adaptive, innovative and quicker to move since then, he writes, citing as evidence the lack of state action that occurred during the millennium bear market and the financial crisis of 2008, and the turmoil that resulted for many European insurers.
Marrion says his prediction—that the fixed annuity industry is not going to fail—does not mean that no fixed annuity carriers will enter state receivership in years to come. “Some carriers will fail due to poor management or unforeseen risks.” However, he contends that the industry itself “is well positioned to withstand the financial challenges to solvency that may occur in future years.”