AM Best Warns of Declining Credit Quality as Annuity Reserves Shift to Lower-Rated Insurers

A new AM Best report reveals a decline in the credit quality of U.S. annuity providers. Learn how a shift in reserves could impact retirement security in 2026.

By: AXL Media

Published: Apr 11, 2026, 6:58 AM EDT

Source: Information for this report was sourced from AM Best.

The Post-Crisis Realignment of Insurance Capital

The structural composition of the U.S. life insurance industry has undergone a fundamental transformation since the 2008 financial crisis, with individual annuities becoming the dominant driver of reserve growth. According to a specialized report from AM Best, funds backing these policies now represent more than 36% of the segment's total reserves, a marked increase from the 32% recorded before the global market collapse. This concentration reflects a broader consumer pivot toward guaranteed retirement income products, but it also concentrates systemic risk within a specific category of financial instruments that are highly sensitive to market fluctuations and credit cycles.

Erosion of Credit Quality in Retirement Holdings

While the volume of annuity reserves has expanded, the average creditworthiness of the institutions holding these assets has noticeably deteriorated over the last two decades. The analysis found that approximately one-third of the segment's annuity reserves are currently sitting on the balance sheets of 95 companies that possess lower Long-Term Issuer Credit Ratings today than they did in 2007. On average, the credit quality of the entities managing these multi-billion-dollar portfolios has dropped by nearly two full notches, raising alarms about the long-term solvency and resilience of the providers responsible for American retirement security.

The Role of Private Entrants and Downgraded Veterans

The decline in overall industry credit quality is being fueled by two distinct internal pressures: the influx of newer market entrants and the weakening of established firms. Erik Miller, a senior director at AM Best, noted that many recent participants in the annuity space have been assigned lower initial ratings than the industry veterans they are competing against. Simultaneously, several long-standing life and annuity companies have faced significant downgrades since the mid-2000s, further diluting the high-grade credit profile that traditionally characterized the life insurance sector.