Many insurance companies that write annuities have suffered downgrades because of severe losses and capital deterioration. Many, however, have maintained strong capital levels that so far have cushioned the blow from the decline in the stock market.
Teachers Insurance and Annuity Association, better known as TIAA-CREF, is the largest annuity company to receive TheStreet.com Ratings' top ranking of A-plus. It lost $3.3 billion in 2008 but held $17.8 billion in capital at year-end. And John Hancock Life Insurance of New York, a subsidiary of Manulife Financial (Stock Quote: MFC), maintains an A rating despite the downgrade to B of two affiliates, John Hancock Variable Life Insurance Co. and John Hancock Life Insurance Co.
Highly rated companies may suffer problems during difficult economic times, but because of their historically sound practices, they have the capital built up to withstand tough times.
Other companies are in a tougher spot. Hartford Life Insurance and Hartford Life & Annuity Insurance, units of Hartford Financial Services Group (Stock Quote: HIG), have gotten hammered. So have Axa Equitable Life Insurance, a division of Axa (Stock Quote: AXA); and ING USA Annuity & Life Insurance, a part of ING Groep.
The financial strength of an insurance company writing the annuity is important. When an insurance company fails, fixed annuity holders are at the mercy of the state guaranty association limits on such contracts. State guaranty limits on annuity account values range from $100,000 to $500,000. The only exception to this would be if another insurer purchased the contracts and agreed to the terms.
Variable annuity holders are, in part, insulated when the insurer fails. If the contract is still in the accumulation phase, the assets are segregated and returned in full, minus any withdrawals, to the contract holder. If the contract is in the annuitization phase, the consequences are the same as with a fixed annuity, and the contract holder is at the mercy of the state guaranty association limits.