Annuity Company Ratings: How to Read Them and Why They Matter

An annuity is only as good as the insurance company standing behind it. The financial strength of an annuity company is crucial in determining its ability to fulfill its obligations to policyholders — and that is exactly what ratings measure. Ratings agencies such as AM Best, Moody's, Standard & Poor's (S&P), and Fitch assess and rate insurance companies based on their financial strength, creditworthiness, and claims-paying ability.

This guide explains how each agency's scale works, how to compare grades across agencies, and what the ratings don't tell you. If you want the grade for a specific company, our carrier strength overview tracks current financial strength ratings across the annuity companies we follow, and the annuity company directory lists each carrier's ratings alongside its products. If you're still getting oriented on annuities themselves, start with the complete guide to annuities.

What Ratings Measure — and What They Don't

A financial strength rating is an agency's opinion of one thing: the insurer's ability to meet its ongoing insurance obligations — in plain terms, to pay claims and honor guarantees for decades to come. That matters more for annuities than for most financial products, because annuity guarantees are backed by the issuing insurance company, not the FDIC. When you buy a contract with a ten-year term or a lifetime income promise, you are betting the company will still be solvent when it's time to pay.

Just as important is what a rating is not. It is not a review of the company's products, a signal that its rates are competitive, or a grade for its customer service. A top-rated carrier can offer a mediocre contract, and a very competitive contract can come from a carrier a few notches down the scale. The rating answers "will they be able to pay?" — everything else you have to evaluate separately.

The Four Agencies, Side by Side

Four agencies dominate insurance ratings: AM Best (the only one focused specifically on insurance), Moody's, S&P, and Fitch. Each uses its own scale, so the same level of financial strength wears a different label at each agency. The table below lines the scales up in roughly comparable rows, from strongest to weakest. The alignment is approximate — the agencies don't publish an official equivalence map — but it's close enough to read any carrier's grades in context.

How Each Agency's Scale Works

AM Best

AM Best's rating scale ranges from A++ (Superior) to F (In Liquidation). The agency also provides additional designations such as "u" (Under Review) and "nr" (Not Rated). The ratings can be broadly classified into three categories:

• Secure ratings (A++ to B+): companies that exhibit strong financial strength and a superior ability to meet their ongoing insurance obligations.
• Vulnerable ratings (B to C): companies with weak financial strength and a limited ability to meet their ongoing insurance obligations.
• In liquidation (D to F): companies in the process of liquidation or placed under regulatory supervision.

AM Best also assigns an outlook to each rating (Positive, Negative, or Stable), which indicates the potential direction of the rating in the medium term.

Moody's

Moody's rating scale ranges from Aaa (Exceptional) to C (Lowest Rated). The ratings can be grouped into three main categories:

• Investment grade (Aaa to Baa): companies with strong financial strength, considered low risk.
• Non-investment grade (Ba to Caa): companies with weaker financial strength, considered speculative or high-risk.
• Highly speculative (Ca to C): companies with extremely weak financial strength, considered highly speculative or near default.

Moody's uses numerical modifiers (1, 2, and 3) to indicate the relative position of a company within a rating category — Aa1 is stronger than Aa3 — and, like AM Best, assigns an outlook to each rating.

Standard & Poor's (S&P)

S&P's rating scale ranges from AAA (Extremely Strong) to R (Regulatory Action). The ratings can be classified into four categories:

• Investment grade (AAA to BBB): companies with strong financial strength, considered low risk.
• Non-investment grade (BB to B): companies with weaker financial strength, considered speculative.
• Highly speculative (CCC to C): companies with very weak financial strength, considered highly speculative or near default.
• Regulatory action (D and R): companies that are either in default or facing regulatory action.

S&P uses "+" and "-" symbols to show relative standing within a rating category, and assigns an outlook (Positive, Negative, or Stable) to its ratings.

Fitch

Fitch's rating scale runs from AAA (Exceptionally Strong) down through designations for companies in or near default. The ratings can be broadly classified into four categories:

• Investment grade (AAA to BBB): companies with strong financial strength, considered low risk.
• Non-investment grade (BB to B): companies with weaker financial strength, considered speculative.
• Highly speculative (CCC to CC): companies with very weak financial strength, considered highly speculative or near default.
• Default (C and below): companies in default or that have defaulted on their financial obligations.

Fitch uses "+" and "-" symbols to denote relative standing within a rating category and assigns an outlook (Positive, Negative, or Stable) to its ratings.

Why the Same Carrier Can Have Different Grades

When comparing ratings across different agencies, it's crucial to remember that each agency has its own rating scale and methodology. A high rating from one agency doesn't necessarily mean the company will have a high rating from another, so it's advisable to compare ratings across multiple agencies to get a comprehensive picture of a company's financial stability.

The letters themselves can mislead. An "A" from AM Best is that agency's third-highest grade; an "A" from S&P sits six notches down its scale, below AAA and the three AA tiers. Read every grade against its own agency's scale — that's what the table above is for. A few habits make cross-agency comparison manageable:

• Understand the rating scales. Familiarize yourself with each agency's scale and its categories (investment grade, non-investment grade, and so on) so you can quickly place a company's grade.
• Look for consistency across agencies. While each agency may use different methodologies, a strong company should generally have high ratings across all of them. Consistent high ratings are a good indicator of financial strength and stability.
• Consider rating outlooks. The outlook (Positive, Negative, or Stable) offers insight into the potential direction of a company's rating in the medium term. A positive outlook suggests the rating may be upgraded, while a negative outlook indicates a potential downgrade.
• Monitor rating changes. Rating downgrades can be a warning sign of potential issues, while upgrades may signal improving financial health.
• Use the agencies' reports. Rating agencies typically publish detailed reports explaining the rationale behind their ratings, with valuable insight into a company's financial health, risk factors, and future prospects.

Where to Check a Carrier's Current Rating

You won't find a carrier-by-carrier ratings table in this guide, and that's deliberate. Individual company ratings change — agencies upgrade and downgrade insurers every year — so a table printed in an article can be badly out of date by the time you read it. Always check the current grade before you buy:

• The carrier strength overview shows current financial strength ratings for the annuity companies we track, side by side.
• The annuity company directory has a page for each carrier with its ratings and product lineup.
• If you'd rather start from the rating and work backward, browse annuities from A-rated carriers or hold out for AA+ and better carriers.

What Ratings Don't Tell You: The Private Equity Question

A rating describes the insurer's balance sheet as the agency sees it today. It says much less about who owns the company — and ownership has been changing hands. Over the past decade, private equity firms have been buying businesses that own billions of dollars of annuity and life insurance assets.

The trend was already measurable years ago. In 2021, Refinitiv counted 191 private-equity-backed insurance deals in the U.S. for the prior year — more than the previous record of 154 set in 2019 — and by mid-2021 buyers had paid $12.1 billion, past the $9.7 billion full-year record set in 2018.

The reasons are straightforward. Insurers were selling off blocks of business in part because of the low interest rates that persisted after the Great Recession, which meant lower returns on bonds and pressure on their ability to pay benefits. Selling part of a business frees up capital to invest elsewhere. For private equity firms, fees from insurance business can serve as a steady income stream that provides "permanent capital" and reduces the need to raise money in the market.

The potential problem: financial advisors, among others, worry that this could hurt consumers who own annuity and life insurance contracts. Customers could be subject to higher costs and fees initiated to boost investor returns. Worse, while a consumer may have purchased a contract based on the insurer's strong financial ratings, the new buyers don't necessarily carry those same ratings. "There's nothing good in this for the policyholder," as Larry Rybka, chairman and CEO of Valmark Financial Group, put it in 2021.

There is a counterargument. Because the buyers are mostly well-capitalized firms, the deals could actually boost investment returns — and in that sense, it's possible for policyholders to benefit. Some private equity owners also have reputational reasons to avoid raising costs on the contracts they acquire.

If a carrier you own — or are considering — has been acquired, here is what to watch:

• The current rating, not the old one. Check whether the agencies have affirmed, upgraded, or downgraded the carrier since the deal closed. The rating that mattered when you bought is not automatically the rating today.
• The outlook. A Negative outlook after an acquisition is the agencies' way of saying they're watching too.
• Fees and costs on existing contracts. Consumers hit by increased costs on an existing contract may feel stuck — transferring or changing a contract can incur more fees or trigger penalties, so understand how surrender charges work before reacting.

The Backstop: State Guaranty Associations

Annuity guarantees are backed by the issuing insurance company, not the FDIC. If an insurer does fail, state guaranty associations provide a backstop: they cover policyholders up to limits set by each state's law, and those limits vary by state and by product type. Because coverage depends on where you live and what you own, check your own state's guaranty association for the specifics.

The backstop is real, but it isn't a reason to ignore ratings. The first line of defense is the insurer's own balance sheet; the guaranty system exists for the rare failures, and working through one takes time. This is also why buyers placing large sums often spread the money across multiple highly rated carriers rather than concentrating everything with one company.

How to Choose an Annuity Company (Beyond the Rating)

With a working understanding of ratings, you can make a more informed decision when selecting an annuity company. Consider the following factors in addition to financial strength:

• Product offerings. Evaluate the variety of annuity products a company offers — fixed, indexed, immediate — and choose a company that provides the type that aligns with your financial goals and risk tolerance. You can put products side by side with our annuity comparison tool and read our product reviews.
• Fees and expenses. Understand and compare the fees and expenses associated with different annuity products, such as surrender charges, annual fees, and rider costs. Opt for a company with competitive fee structures that don't erode your returns — the annuity fee calculator shows what fees do to a contract's value over time.
• Customer service. Assess the company's reputation for customer service, claims processing, and support. Look for companies that are responsive, helpful, and easy to work with — this matters over a contract that may run for decades.
• Track record. Review the company's history on renewal rates, claims processing, and customer satisfaction. A company with a strong track record is more likely to deliver a positive experience for its policyholders.

Selecting the right annuity company is a crucial decision that can significantly impact your financial future. By evaluating the financial strength, product offerings, fees, customer service, and track record of various annuity companies, you can make a well-informed decision that aligns with your financial goals and needs. And before you commit, consult a professional financial advisor to make sure the contract you choose is appropriate for your unique financial situation.