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While driving to Sam’s Club the other day I heard a radio commercial from a company called Professional Life and Casualty. They claim to offer at least a 2.5% fixed interest rate on tax-deferred annuities including investments for your traditional and Roth IRA accounts. Sounds like a great deal in this environment or is it?

Who is Professional Life and Casualty?

Professional Life and Casualty is a privately held life insurance company based here in Chicago. In April of 2011 insurance rating company AM Best issued this ranking and commentary about the company:

“A.M. Best Co. has affirmed the financial strength rating (FSR) of C+ (Marginal) and issuer credit rating (ICR) of “b-” of Professional Life & Casualty Company (Professional Life) (Chicago, IL). The outlook for both ratings is stable. Concurrently, A.M. Best has withdrawn the ratings at the company’s request and assigned a category NR-4 to the FSR and an “nr” to the ICR.

The ratings primarily reflect Professional Life’s elevated level of below investment grade fixed income securities and preferred stock in its general account investment portfolio. These below investment grade securities currently represent approximately 175% of the company’s capital and surplus and one-third of invested assets. While Professional Life currently maintains an adequate amount of risk-adjusted capital for its current ratings, these investments add a significant amount of risk and volatility to the investment portfolio. Professional Life also remains exposed by the absence of an active asset/liability management strategy, as well as by the company’s lack of surrender protection on its annuity offerings. The absence of surrender charges on these annuity contracts allows for early withdrawal of contracts for any reason and creates liquidity concerns for the company should annuity surrenders increase unexpectedly.

Partially offsetting these negative rating factors are the noticeable increases in Professional Life’s annuity premiums in recent periods, which were primarily the result of the favorable fixed annuity market environment in 2008 and 2009 and the company’s increased marketing activities. Professional Life also has recorded positive net operating gains over the past five-year period due to generally increasing net investment income and good persistency on its annuities. The annuities offer very attractive credited interest rates with high guaranteed minimums, which has helped attract new customers.”

I’m not an expert on insurance companies or their strength rankings but there are at least a couple of red flags above.

The company’s claims

From the company’s website under the heading “how it works” comes the following:

“The Board of Directors of Professional Life & Casualty Company meets periodically to declare an interest rate for all funds on deposit with us for the calendar year. The current 2012 interest rate is 3.5% for all funds on deposit, and new deposits received by the company. (This rate is subject to change.) There are never any surrender charges or fees deducted from your account. You can make additional deposits at any time during the year. The deposits earn interest at the current declared rate at the time of deposit. That interest rate is guaranteed until the end of the calendar year. All funds earn interest and work to help you meet your retirement goals.

No surrender charges

No administrative fees

No withdrawal fees

Consistent Competitive Performance

Your annuity earns a highly competitive return. There are no administrative fees or withdrawal charges. Both contributions and withdrawal privileges are flexible. (Although you may make withdrawals from your account at any time with no surrender charges imposed by PLC, early withdrawal from an annuity may result in tax penalties. You should consult your tax advisor.”

Many of the A.M. Best concerns are right there.

Fixed annuities like the ones offered by Professional Life do not generally assess mortality and expense charges like variable annuities do, but none the less there are expenses. These expenses are reflected in the rate of interest paid. This leads me to believe that the higher risk investments referenced in the A.M. Best comments are what is driving the company’s bottom line, and what allows the company to offer these high rates of interest to its contract holders. Overall I would question the ability of the company to maintain these high levels of interest should their investments be impacted by adverse financial market conditions in the future.

Issues to consider before writing a check

My point in writing this post is not to pick on Professional Life and Casualty, but rather to use their offering as an example of some red flag questions to ask before purchasing an annuity or most any other type of financial product for that matter.

Any investment offering a higher than market rate of interest should be scrutinized. A.M. Best cites both a lack of an investment strategy to match the company’s assets and liabilities as well as potential liquidity concerns. This in itself is a mouthful.

Any insurance company offering annuity products has potential future liabilities in the form of anticipated benefit payments and a well-managed insurance company (at least in my opinion) would structure its investment strategy to match their assets to these potential liabilities to the extent possible. Liquidity concerns could impact the company’s ability to pay future benefits and could cause contract holders to lose out totally or in part on anticipated benefit payments.

Insurers are regulated at the state level. While I’m not saying this will happen, should Professional Life (or any annuity provider) become unable to make contractually obligated benefit payments on an annuity contract the applicable state insurance commissioner becomes the backstop, subject to any limitations in the state insurance statutes. Many states are in poor fiscal condition and this could impact the ability of the state’s insurance commissioner to back-up these obligations.

The point here is that you should be a skeptical consumer when it comes to any claims made in a financial services commercial. Using the Professional Life and Casualty interest rates as an example, you need to look behind these numbers and make sure that you are comfortable that the company has the financial strength to back up their promises. You also need to understand how these interest rates are set and how often they are subject to change.

I am not saying that Professional Life and Casualty is not a fine company or that the products that they offer are not good ones. Frankly I don’t know enough about the company to make either determination. However after hearing their commercial on the radio and doing just a few searches online I feel that anyone considering purchasing an annuity from the company should do their due diligence and resolve the questions raised above to their satisfaction first.

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