An annuity is a contract that may need to pay you for 25 or 30 years, and the only party that can pay is the insurance company that issued it. That makes the company’s financial health the first thing to check, before the payout rate or the riders. Learning how to evaluate annuity company ratings takes about an hour of reading and gives you a concrete way to screen out carriers before you spend time on their products.
Why the insurer’s strength matters more than the annuity’s features
A guaranteed income rider, a 10-year surrender schedule and a generous cap on a fixed indexed annuity are all promises written in a contract. The insurer’s balance sheet decides whether those promises are kept. A feature that looks impressive in a brochure is worth very little if the company behind it is in financial trouble in 2045 or 2050.
The time horizon is what makes this different from most purchases. A bank account can be moved in an afternoon. An annuity often carries surrender charges, tax consequences on withdrawal, or income that has already started and cannot be reversed. Once you commit, switching carriers is slow and can be expensive.
Because of that, the order in which you evaluate matters. Screen the insurer first, then compare products among the carriers that pass.
What a rating really measures (and what it leaves out)
An insurer financial strength rating is an agency’s opinion of how likely the company is to meet its obligations to policyholders. In plain terms, it is a judgment about claims-paying ability. The analysts look at the company’s capital, the quality of its investments, its earnings, the mix of business it writes, and how well it manages risk.
That scope is narrow, and the limits are worth knowing:
- Product quality. A top-rated insurer can sell an annuity with high fees, steep surrender charges or a low participation rate.
- Returns. The rating says nothing about what your contract will credit or pay.
- Suitability. It cannot tell you whether an annuity fits your income needs, tax situation or time horizon.
- Service. Claims handling, paperwork speed and customer support are not part of it.
- The future. A rating is a forward-looking opinion. It can lag behind real problems, and agencies have been slow to act in the past.
One more point: insurers typically pay the agencies for their ratings. That does not make the ratings worthless, but it is a reason to read more than one agency and to look at the written reasoning behind a grade, not only the letter.
AM Best, Moody’s and S&P: who they are and how their scales differ
AM Best is a rating agency focused on the insurance industry. Moody’s and S&P Global Ratings are large credit rating agencies that rate corporations, governments and many other issuers, including insurers. All three publish a financial strength rating for individual insurance companies, but each uses its own letters.
AM Best (Financial Strength Rating), from the top:
- A++ and A+: Superior
- A and A-: Excellent
- B++ and B+: Good
- B and B-: Fair
- C++ and C+: Marginal
- C and C-: Weak
- D: Poor
Below D are E (under regulatory supervision), F (in liquidation) and S (rating suspended).
S&P uses AAA, AA, A, BBB, BB, B, CCC, CC and R, with plus and minus signs inside the categories from AA to CCC. Moody’s uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C, with numeric modifiers 1, 2 and 3 on the categories from Aa to Caa, where 1 is the strongest.
The scales do not line up one to one. An AM Best “A” falls in the second tier of its scale, while an S&P “A” falls in the third category of its scale. Never compare letters across agencies as if they meant the same thing. Compare where each rating sits within its own scale.
Reading the letters: where the secure range ends and the caution zone begins
Each agency draws a line between ratings it considers secure and those it considers vulnerable or speculative.
- AM Best: B+ and above is considered “secure.” B and below is “vulnerable.”
- S&P: BBB- and above is investment grade. BB+ and below is speculative grade.
- Moody’s: Baa3 and above is investment grade. Ba1 and below is speculative grade.
Those lines mark the minimum for being in the safer category. They are not a recommendation. An insurer sitting at B+ or BBB- is one downgrade away from the caution zone, and a retiree buying something meant to last decades may reasonably want more room than that. Where you set your own minimum is a personal decision. Many people choose to stay in the A range at AM Best, S&P and Moody’s, but that is a preference, not an official standard.
Read the outlook, not only the grade
Next to the rating you will find an outlook: positive, stable or negative (S&P and Moody’s also use “developing”). The outlook signals the direction the agency thinks the rating may go over the next one to two years. A strong rating with a negative outlook tells you something that the letter alone does not. A “credit watch” (S&P), “review for downgrade” (Moody’s) or “under review with negative implications” (AM Best) is a stronger signal still, because the agency is actively reconsidering the rating.
When the agencies disagree: how to handle a split rating
Agencies often assign different grades to the same insurer. Take a hypothetical company rated A+ by AM Best, A by S&P and Baa1 by Moody’s. All three ratings are in the secure range, but the spread is wide enough to ask why.
Here is a practical way to handle it:
- Find each agency’s written rationale. Press releases and rating reports usually name the factors behind the grade, such as the investment mix, reliance on reinsurance, debt at the parent company, or concentration in one product line.
- Check the direction. An insurer with a lower rating and a positive outlook can be in a better position than one with a higher rating and a negative outlook.
- Use the lowest rating as your working number. It is the most cautious reading, and if the company passes your minimum on that basis, the split matters less.
- Ask the agent or insurer to explain the gap. A good answer cites the agencies’ stated reasons. A vague answer or a change of subject is useful information.
Some insurers are rated by only one or two of the agencies. That is not automatically a problem, since the cost of a rating leads some smaller carriers to choose one agency. It is still a reason to ask which agencies rate the company and why the others do not. An insurer with no rating from any of the three deserves extra scrutiny before you commit meaningful money.
How to look up a current rating and outlook before you sign
Do not rely on the number printed in a sales illustration or quoted by an agent. Ratings change, and marketing material can be months old. Check the source yourself.
- Start with the exact company. Find the legal name of the insurer that will issue your contract on the application or product disclosure. Ratings apply to a specific insurance company, and a parent company or brand name may carry a different rating.
- Use the agencies’ own websites. AM Best’s site offers a ratings search, and the basic rating is generally viewable without a fee, though you may need to register. S&P and Moody’s publish rating announcements, and full reports are often behind a paywall, but the rating and outlook usually appear in their public releases.
- Check the insurer’s website. Many carriers have a financial strength or ratings page, usually with the date of each rating. Confirm anything you find there against the agency itself.
- Look at the date and any recent actions. Search the company name with “downgrade,” “outlook” or “rating action” to see whether anything changed recently.
- Ask for it in writing. Ask the agent to put the current ratings from all three agencies in an email, then verify them yourself.
Your state insurance department is another resource. It can tell you whether the company is licensed to sell in your state and whether it has faced regulatory action.
Ratings are not a guarantee: state guaranty associations and diversifying across carriers
Highly rated insurers have still failed. A rating lowers the odds of a problem but does not remove it. That is why a second layer of protection exists.
Every state has a life and health insurance guaranty association. If an insurer is declared insolvent and liquidated, the association steps in to continue or pay out covered contracts, up to limits set by state law. Some key points:
- The limits vary by state. For annuities, many states cap coverage at $250,000 in present value of benefits per person, per insurer, while some set higher caps. Confirm the figure for your state before you buy.
- Coverage is usually tied to where you live, not where the insurer is based.
- It is not government insurance like FDIC coverage on bank deposits. The associations are funded by assessments on other insurers in the state, and the process of transferring or paying contracts can take time, and may change some contract terms.
- Not every product or feature is covered the same way. Check which contract types qualify.
If you are considering a larger purchase, one common approach is to divide it among several carriers so that each contract stays within your state’s guaranty limit. This has real tradeoffs: more paperwork, more companies to monitor, and possibly different pricing from one carrier to the next. It is worth weighing against the amount you would have at risk with a single company. Your state’s guaranty association website lists its current limits and what is covered.
A short checklist to run on any insurer before you buy
Work through these points for every company on your shortlist:
- Confirm the issuing company’s exact legal name from the contract or application.
- Look up the current rating from AM Best, S&P and Moody’s, and note which agencies do not rate the company.
- Record the outlook and any watch or review status for each rating.
- Compare each rating with your own minimum, using the lowest rating if they differ.
- Read the rationale for any split or recent change in the agencies’ published reasoning.
- Check the date of every rating you rely on.
- Look up your state’s guaranty association limit for annuities and compare it with the amount you plan to place with this carrier.
- Decide whether to spread the money across more than one insurer.
- Note any pressure to decide quickly. Urgency from a salesperson is a warning in its own right, and our guide to annuity sales red flags covers the tactics to watch for.
Before you commit to any carrier, run this checklist on every insurer on your shortlist, then compare the products themselves using our guide to comparing different annuity products.