how stable are insurance company ratings

[kls3806]

A couple of questions:

I'm on the blueprint website looking at SPIA quotes and I'm focused on companies with an A++ or A+ rating. Do we know how stable these ratings are historically? In other words, might a company rated A+ today have been rated considerably lower 5 years ago? In essence I'm trying to determine how robust these measures are - if I'm taking a lower annual payout, I want to know I'm getting something in return, namely a reduced likelihood of insurance company failure.

In addition, while we are both looking to purchase joint SPIA separately, we don't think its a great idea to choose the same insurance company. NY Life has both a high rating and a competitive annual payout so an easy choice for one of us. However, the next A++ company (Mass Mutual) offers a much lower payout. Is it work it to stick with A++ or are the A+ companies (Penn Mutual, Western & Southern, Pacific Life) safe alternatives.

Appreciate all you bogleheads.....

[samsoes]

A couple of questions:

I'm on the blueprint website looking at SPIA quotes and I'm focused on companies with an A++ or A+ rating. Do we know how stable these ratings are historically? In other words, might a company rated A+ today have been rated considerably lower 5 years ago? In essence I'm trying to determine how robust these measures are - if I'm taking a lower annual payout, I want to know I'm getting something in return, namely a reduced likelihood of insurance company failure.

In addition, while we are both looking to purchase joint SPIA separately, we don't think its a great idea to choose the same insurance company. NY Life has both a high rating and a competitive annual payout so an easy choice for one of us. However, the next A++ company (Mass Mutual) offers a much lower payout. Is it work it to stick with A++ or are the A+ companies (Penn Mutual, Western & Southern, Pacific Life) safe alternatives.

Appreciate all you bogleheads.....

What's the blueprint website?

[kls3806]

A couple of questions:

I'm on the blueprint website looking at SPIA quotes and I'm focused on companies with an A++ or A+ rating. Do we know how stable these ratings are historically? In other words, might a company rated A+ today have been rated considerably lower 5 years ago? In essence I'm trying to determine how robust these measures are - if I'm taking a lower annual payout, I want to know I'm getting something in return, namely a reduced likelihood of insurance company failure.

In addition, while we are both looking to purchase joint SPIA separately, we don't think its a great idea to choose the same insurance company. NY Life has both a high rating and a competitive annual payout so an easy choice for one of us. However, the next A++ company (Mass Mutual) offers a much lower payout. Is it work it to stick with A++ or are the A+ companies (Penn Mutual, Western & Southern, Pacific Life) safe alternatives.

Appreciate all you bogleheads.....

What's the blueprint website?

Its a frequently boglehead recommended site to purchase annuities. Others were recommended as well but this was a remarkably easy website to negotiate.

https://www.blueprintincome.com/

https://www.blueprintincome.com

[Kenkat]

Insurance company ratings tend to be very stable and it is a huge deal to the company when the rating changes even one step either up (hooray!) or down (company plan to address the change gets implemented). It would be highly unusual for a company to go from A+ to A- for example in a year, even over several years. Not impossible but very unlikely.

I’d personally be very comfortable with an A+ company, especially the ones you listed, all of which are very well capitalized and well regarded.

[Stinky]

Insurance company ratings tend to be very stable and it is a huge deal to the company when the rating changes even one step either up (hooray!) or down (company plan to address the change gets implemented). It would be highly unusual for a company to go from A+ to A- for example in a year, even over several years. Not impossible but very unlikely.

I’d personally be very comfortable with an A+ company, especially the ones you listed, all of which are very well capitalized and well regarded.

I agree 100% with Kenkat. His observations are spot on. I’d also buy from any of the companies listed.

During my working career, I worked with and visited the insurance rating agencies many times over many years. So I have more knowledge of insurance rating agencies than the average man on the street.

[nisiprius]

I would say "not stable enough," given that you are possibly looking at time frames of decades.

When I bought my SPIA in 2007 at what was then "AIG Life Insurance Company" (it has discreetly changed its name back to "American General"), it had an A++ Best's rating, which was Best's top rating. By 2010, just three years later, the rating had dropped to "A" with "negative outlook." It can be argued that any rating with an "A" in it means a "safe" company, but it was unnerving nevertheless.

What one would really like to know are the percentages of companies that became insolvent as function of rating and length of time period. of course. I don't know the answer. A few years before it collapsed, I wonder what rating the Executive Life Insurance Company of California, ELIC, had?

Personally, in addition to ratings somewhere in the A range and not too close to the bottom, I would want to see those ratings from all four of the major NSROs: A. M. Best, Fitch, Moody, S&P. Some people in this forum had disagreed with me on that. But I think not having ratings from all four is a yellow flag, and so many companies do have all four that life is too short to fuss with the others.

[kls3806]

Insurance company ratings tend to be very stable and it is a huge deal to the company when the rating changes even one step either up (hooray!) or down (company plan to address the change gets implemented). It would be highly unusual for a company to go from A+ to A- for example in a year, even over several years. Not impossible but very unlikely.

I’d personally be very comfortable with an A+ company, especially the ones you listed, all of which are very well capitalized and well regarded.

I agree 100% with Kenkat. His observations are spot on. I’d also buy from any of the companies listed.

During my working career, I worked with and visited the insurance rating agencies many times over many years. So I have more knowledge of insurance rating agencies than the average man on the street.

I think AIG is the only A++ life insurance company to ever 'fail". Was that related to mortgage-backed securities and credit default swaps? Is that a common component of these companies? What makes PennMutual get an A++ and NY Life or Mass Mutual get an A++? We feel good about buying some piece of mind here but want to make sure we don't shoot ourselves in the foot. Thoughts?

[Stinky]

I think AIG is the only A++ life insurance company to ever 'fail". Was that related to mortgage-backed securities and credit default swaps? Is that a common component of these companies? What makes PennMutual get an A++ and NY Life or Mass Mutual get an A++? We feel good about buying some piece of mind here but want to make sure we don't shoot ourselves in the foot. Thoughts?

The AIG life insurance companies didn’t fail.

The well publicized issues at AIG were credit default swaps that were held outside of the life insurance companies, elsewhere in the corporate structure. The life insurance companies may have been downgraded, but they survived and thrive to this day.

The companies you mention have two things in common that make them very ratings-attractive. First, they are all “mutual” life insurance companies, which mean that they are owned by their policyholders rather than shareholders. Second, they all have large blocks of whole life insurance. While many Bogleheads (myself included) regard whole life as an unattractive product for most consumers, rating agencies look at it as a very attractive product because of the huge flexibility the companies have to change policyholder dividends. For example, insurers can reduce dividend scales during times of low interest rates, protecting the insurers’ profit margins.

[rjbraun]

Investopedia provides an overview of S&P's rating process for insurance companies, including links to various referenced materials.

https://www.investopedia.com/terms/s/sp ... rating.asp

[nisiprius]

I think AIG is the only A++ life insurance company to ever 'fail".

You're understandably confused.

AIG was a holding company. It held a lot of assets. Some of them were life insurance companies. Those companies were sound and did not fail. I know because every month I get my appointed payments from the SPIA I bought from the "AIG Life Insurance Company" (which has changed its name to American General to avoid the bad associations with AIG). The AIG Life Insurance Company never fell out of the A ratings range.

[rjbraun]

I think AIG is the only A++ life insurance company to ever 'fail".

You're understandably confused.

AIG was a holding company. It held a lot of assets. Some of them were life insurance companies. Those companies were sound and did not fail. I know because every month I get my appointed payments from the SPIA I bought from the "AIG Life Insurance Company" (which has changed its name to American General to avoid the bad associations with AIG). The AIG Life Insurance Company never fell out of the A ratings range.

Beginning on p. 4 of the attached testimony of the National Association of Insurance Commissioners ("NAIC") before a US House Subcommittee in March 2009, is information on AIG Financial Products, which as others have already noted, was the problem, not any of the AIG insurance companies.

https://content.naic.org/sites/default/ ... 3_ario.pdf

[kls3806]

I think AIG is the only A++ life insurance company to ever 'fail". Was that related to mortgage-backed securities and credit default swaps? Is that a common component of these companies? What makes PennMutual get an A++ and NY Life or Mass Mutual get an A++? We feel good about buying some piece of mind here but want to make sure we don't shoot ourselves in the foot. Thoughts?

The AIG life insurance companies didn’t fail.

The well publicized issues at AIG were credit default swaps that were held outside of the life insurance companies, elsewhere in the corporate structure. The life insurance companies may have been downgraded, but they survived and thrive to this day.

The companies you mention have two things in common that make them very ratings-attractive. First, they are all “mutual” life insurance companies, which mean that they are owned by their policyholders rather than shareholders. Second, they all have large blocks of whole life insurance. While many Bogleheads (myself included) regard whole life as an unattractive product for most consumers, rating agencies look at it as a very attractive product because of the huge flexibility the companies have to change policyholder dividends. For example, insurers can reduce dividend scales during times of low interest rates, protecting the insurers’ profit margins.

Thanks again Stinky....we went with NY Life for one and Penn Mutual for the other. These quotes were frozen last week - thankfully - so we moved forward with the applications today. Now just need to sort how to set the stock vs. bond/fixed split since it was our intention to fund the SPIAs from the bond funds in our IRA's. After the movements in the markets this month, we are sitting at 61% stock, 34% bonds and 5% MM. After we fund the annuities, we will be 72% stock, 21% bonds and 7% cash. Since we will not start taking income from the annuities until next March, I'm feeling fine about these splits. Any thoughts on the splits?

[Stinky]

After the movements in the markets this month, we are sitting at 61% stock, 34% bonds and 5% MM. After we fund the annuities, we will be 72% stock, 21% bonds and 7% cash. Since we will not start taking income from the annuities until next March, I'm feeling fine about these splits. Any thoughts on the splits?

If you were comfortable with your asset allocation before you purchased the annuities, I think you should feel equally comfortable with your asset allocation now.

[nisiprius]

I think of my SPIAs (AKA income annuities) as "frozen bonds." They are like bonds in the sense of being a low-risk asset and a reliable source of an income stream. They are unlike bonds in that they are illiquid and can't be sold or rebalanced. When I was accumulating and tracking that sort of thing, I did two calculations of asset allocation, one of which included the (present value of) the annuities as if they were bonds, and one that didn't.

If you sell bonds for $X and then use $X to buy a SPIA, then in terms of portfolio value fluctuation and most kinds of "risk," I don't think anything has changed.

[Northern Flicker]

If you execute a search on

<insurance company name> am best

you often will see a link to a news release of their most recent evaluation, which will say whether or not the outlook is stable or negative. See the 2nd to last sentence of the first and second paragraphs in the Sept. 2024 news release for Mass Mutual as an example:

https://news.ambest.com/newscontent.aspx?refnum=260926

Of course, if it someday becomes unstable, it will be rated as stable until in one review it isn't. But that's probably the best you can do.

[kls3806]

If you execute a search on

<insurance company name> am best

you often will see a link to a new release of their most recent evaluation, which will say whether or not the outlook is stable or negative. See the 2nd to last sentence of the first and second paragraphs in the Sept. 2024 news release for Mass Mutual as an example:

https://news.ambest.com/newscontent.aspx?refnum=260926

Of course, if it someday becomes unstable, it will be rated as stable until in one review it isn't. But that's probably the best you can do.

Super helpful - thanks!

[kls3806]

I think of my SPIAs (AKA income annuities) as "frozen bonds." They are like bonds in the sense of being a low-risk asset and a reliable source of an income stream. They are unlike bonds in that they are illiquid and can't be sold or rebalanced. When I was accumulating and tracking that sort of thing, I did two calculations of asset allocation, one of which included the (present value of) the annuities as if they were bonds, and one that didn't.

If you sell bonds for $X and then use $X to buy a SPIA, then in terms of portfolio value fluctuation and most kinds of "risk," I don't think anything has changed.

Thanks!

[kls3806]

After the movements in the markets this month, we are sitting at 61% stock, 34% bonds and 5% MM. After we fund the annuities, we will be 72% stock, 21% bonds and 7% cash. Since we will not start taking income from the annuities until next March, I'm feeling fine about these splits. Any thoughts on the splits?

If you were comfortable with your asset allocation before you purchased the annuities, I think you should feel equally comfortable with your asset allocation now.

Thanks to you, I've learned more about bonds and annuities in the last month or two. It may drive some people crazy to 'lose' the principle but we feel like this is financially prudent given our overall portfolio. Thank you so much for your thoughts and input. Your nickname may be stinky but around our house, we call you 'sage stinky'

[ScubaHogg]

I think AIG is the only A++ life insurance company to ever 'fail". Was that related to mortgage-backed securities and credit default swaps? Is that a common component of these companies? What makes PennMutual get an A++ and NY Life or Mass Mutual get an A++? We feel good about buying some piece of mind here but want to make sure we don't shoot ourselves in the foot. Thoughts?

The AIG life insurance companies didn’t fail.

The well publicized issues at AIG were credit default swaps that were held outside of the life insurance companies, elsewhere in the corporate structure. The life insurance companies may have been downgraded, but they survived and thrive to this day.

Yeah, but what would have happened without the giant government bailout? People say the insurer would have been unaffected, but I don’tknow, they always say it in a handwavy way. It’s hard to imagine being out the tune of hundreds of billions of dollars would not have affected the whole company somehow

Or maybe it wouldn’t have. But then why did the AIG insurer get downgraded as Nisi outlined?