Annuity Reserves Decline in Credit Quality Since 2007

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A new AM Best analysis reveals that funds held to back individual annuity policies now account for over 36% of the U.S. life/annuity insurance segment's overall reserves, up from 32% prior to the 2008 financial crisis. The report shows a drastic shift in life insurance reserves toward annuity products, and a slide in credit quality, with a larger portion of these annuity reserves now held by companies with an AM Best Credit Rating that is nearly two notches lower compared to 2007.

Why it matters

This shift toward lower-rated insurers backing annuity products raises concerns about the overall financial strength and stability of the life insurance industry, which is heavily reliant on annuity reserves to fund retirement income promises. It also highlights the growing role of private equity and asset management firms in the annuity market, which may be introducing additional operational complexity and risk.

The details

The report notes that approximately one-third of the segment's annuity reserves are tied to the balance sheets of 95 companies that have a lower Long-Term Issuer Credit Rating now than they did in 2007. Publicly traded companies account for almost half of these reserves, but privately held companies saw the largest average downgrade. This has been driven by newer entrants that have been assigned lower ratings, as well as established life/annuity companies that have been downgraded.

• The shift toward annuity products has occurred since the 2008 financial crisis, with the percentage of overall life/annuity reserves tied to annuities increasing from 32% to over 36% as of 2025.
• The credit quality of the insurers backing these annuity reserves has declined, with a larger portion now held by companies with an AM Best Credit Rating that is nearly two notches lower compared to 2007.

What they’re saying

What’s next

The report suggests that more limited growth prospects would force companies to take market share from others, whether through more competitive rates and bids or a distribution force that offers more options and solutions. This could either dampen earnings or require material investment in new capabilities, ultimately pressuring profitability and in turn, balance sheet strength.