Safety is a relative term because what is safe to one person is risky to another. For instance you may consider a U.S. Treasury bond one of the safest investments since it is backed by our government. But a true skeptic might say, “Suppose the U.S. government went belly-up? The bond could then be worthless.” Or he might argue that the government’s unabated printing of money will debase our currency making dollar investments worthless. Yes, he could have a valid point. However, putting the extremes aside, safety is one of the top reasons that people buy fixed annuities.
There are several independent rating agencies that regularly assess the financial strength of insurance and annuity companies. Included are A.M. Best, Duff & Phelps, Moody’s, Standard & Poor’s, and Weiss Research. These firms will give you an evaluation of a company’s balance sheet strength, operating performance, and ability to meet ongoing obligations. In addition, all companies must follow the “legal reserve system.” This is a set of rules on asset management, accounting, and reserve requirements.
The reserve requirements assure that funds are set aside specifically to protect against an insurance company’s portfolio losses. Furthermore, insurance companies are state regulated. And all 50 states, the District of Columbia, and Puerto Rico have guaranty associations to which licensed life and health insurers must belong. When states determine that an insurer is insolvent, a mechanism within the association protects the policyholders and can possibly help pay the claims against financially-troubled insurance companies.
This does not mean you should throw caution to the wind. Weiss Ratings are the most conservative and rate the short term liquidity of the insurance company if they had a short term “run.” Weiss Rating of B or better is strong. AM Best ratings are the least useful as over the years, they have freely given out A ratings to companies that had not earned such.
When First Capital failed, an annuity company in Southern California that had a high percentage of junk bonds in its portfolio, it had an A rating form Best. And although no investors lost any money because of the State’s efforts to have another insurance company assume First Capital’s, there was a moratorium on withdrawals and investors could not access their accounts for 5 years.
A good source of annuity safety ratings is to consult the “Comdex ratings” given by Vital Signs. A Comdex rating of 80 or better is very good. An experienced retirement consultant will have access to Vital Signs reports.