Eric: That's right. State law here in Illinois, precludes us... Dick: And most other states. Eric: ...
From, let's just disclose. The state guaranty, Insurance Guaranty Association, basically is a piece that's out there and it's often confused with FDIC. Dick: Right, and it's not FDIC. Eric: Because guaranty associations have caps or maximums like...
Dick: Right. Like the FDIC. Frequently, I've had clients bring that question up to me. "What about the state guaranty association?" I've actually called our state guaranty association Eric, and I've said, "What should I do in a situation like this when I'm presenting an annuity and someone's asking me questions about the guaranty association?" One thing that they suggested was, well have them call us, so call your state guaranty association.
One thing that you might want to be aware of is that these caps vary from state to state and that's the difference between the FDIC. The FDIC is federal and federal is absolutely going to guarantee the same for everyone up to $250,000 per account. Eric: Insurance companies are regulated on the state level. Each different state has a Department of Insurance that oversees these.
Dick: Right. In these states, I've seen anywhere from $100,000 up to $500,000, and here in Illinois about a year and a half ago or so it was changed to $250,000 on annuities. Eric: Just to make it more confusing, because that was the same amount that the FDIC was insuring. Dick: Right, so let's talk about what folks should be considering when they're buying an annuity, and we agree that the guaranty association is an added layer of protection, but that is not what you should be considering when you're buying an annuity.
Eric: First and foremost, are the claims paying ability of the insurance company. Dick: Yes, it is. Eric: It's being able to evaluate the insurance company, and its ability to fulfill its obligation to you as a contract holder, and then so the most common thing that people reference is third party agency reports. Now of course, the question we get is...
Dick: There are a lot of third party rating agencies. Eric: ... Which third party, so you've got AM Best, you've got Fitch's, S&P, Comdex. Dick: Weiss.
Eric: So which one do you pick and want? Dick: There's nothing wrong with looking at several of them, however, one thing that we fall back on a lot of times is AM Best, because they really tend to have been around for a good length of time, and that has been their specialty, not regulating but evaluating these insurance companies, and they're very, very thorough, so I like AM Best, but I'll also use some of the others. Eric: Now the question I get asked is, "All right, now I. Look at these reports. Are they going to be in English or are they going to be in...?" Dick: They truly are, you can actually go out to AM Best, and you can put in the company's name and you can read an evaluation on it.
Yes, they have some very in-depth reports that could bore you to death, and good reading to fall asleep to, but they also have summary reports which are much simpler and straight to the point. One thing that I would like to say, that I like about third party rating agencies is that in our experience Eric, when we watch these companies that are doing really well or the companies that are maybe getting into a little bit of trouble that it's a very slow process as a rule. As they, these rating agencies look at these companies and they may go from a positive outlook, to a stable outlook, to a negative outlook. This may take a period of years, just to go through those three stages, before they're actually downgraded.
And so you've typically got time, before a company would go from like say, an A-rated company down to a C-rated company. There's usually a period of years that would happen and it gives us time to evaluate and make decisions. Eric: And most of these rating agencies don't just, it's not your standard grading scale that you got in school, or you're A-B-C-D-F. It's literally, you've got the A++, and when you're looking at those ratings you have to really decipher.
The first thing you have to do is look at the code itself and figure out what is good, what is excellent, and where that kind of transition stands. So if you start to see a company that drops down year after year, more challenge. But you're going to see it move from an A to an A- to a B++, to a B+ to a B. Dick: Right, so you've got time.
These rating agencies are basing this on changes in assets and changes in business climate and so many different factors. I. Think that we need to touch on that, that because each of these companies is regulated by the state, they have a very strict type of accounting. It's called statutory type of accounting.
I look at it as kind of, like a show me the cash type of accounting, as compared to an accrual type of an accounting that might be used with the GAAP method, the generally accepted accounting practices, right. Eric: They're not able to hide the money as well, in a sense of moving it from one area to another. Dick: Hiding expenses or hiding; the state can come in and be very transparent with them and they can see that the investments, the underlying investments that protect the client's assets and funds; are what they should be, high-grade investment bonds or treasuries, this type of thing. Eric: The reserve ratio that insurance companies are required to have, in order to basically just be in compliance with their state regulation, dictates what they're able to kind of put in different buckets and how they're able to spend money.
But the key aspect there is they're going to be in compliance. The state comes in and they're looking at the books, if they're not in compliance, that's when the state starts to move in and take over. Dick: Right. Unlike maybe a larger corporation that would get into trouble and have to file bankruptcy, typically if an insurance company gets into a little bit of trouble the state is watching it way ahead of time.
We have access to third party ratings way ahead of time and what will typically happen, is all of those assets will be moved over to a more profitable company and that's called receivership when that company's put in receivership, and so the client's assets are protected and just moved to a company that's operating more profitably. Eric: The one thing you must understand is annuities are about confidence and confidence in insurance companies, and the insurance industry understands that, because if there was somebody that lost money in an annuity, the whole industry would have a down. Dick: It would hurt the entire industry. Eric: So what we have is an industry that really self-polices itself on a big level, because they want to make sure that, basically everybody's comfortable with these products, and they're confident in their ability to deliver on what they've been offering.
Dick: If you go out and you Google losses in annuities, losses in hybrid annuities, losses in indexed annuities, losses in fixed annuities, now variable annuities it's different, because you actually have an investment and you can lose money in that annuity. But to lose money in a fixed annuity, an immediate annuity you will find that if you Google that type of information, that it's almost unheard of, that anyone has lost any substantial money in annuities because it is one of the safest places, that you can put your money in a retirement style portfolio. Eric: To wrap it up, I think that's probably the best statement we could make, is that historically annuities are one of the safest places to put your money. Dick: Right.
Eric: Thanks for checking us out. Dick: Thank you..
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