What “Guaranteed” Actually Means
When an insurance company sells you an annuity with a “guaranteed” rate or a “guaranteed” lifetime income stream, it means the company is contractually obligated to pay you exactly what the contract specifies. That obligation is real and legally binding. But it is backed solely by the insurance company itself — not by the federal government, not by the FDIC, and not by any external guarantor.
An insurance company’s claims-paying ability is its financial capacity to meet all contractual obligations to policyholders — including annuity payments, death benefits, and surrender values — as they come due. It is determined by the company’s reserves, capital surplus, investment portfolio quality, and overall financial management. Every annuity guarantee rests on this foundation. When a company’s claims-paying ability is strong, its guarantees are strong. When it weakens, so do the guarantees.
This distinction matters because many consumers hear “guaranteed” and assume government protection similar to FDIC insurance on bank deposits. That assumption is wrong and dangerous. FDIC insurance is backed by the full faith and credit of the United States government. Annuity guarantees are backed by private insurance companies. Both can be very safe, but the protection mechanisms are fundamentally different.
The good news: insurance companies are among the most tightly regulated financial institutions in the United States. State insurance departments require carriers to maintain substantial reserves, invest conservatively, and undergo regular financial examinations. The industry’s track record is strong — major insurer failures are rare. But rare does not mean impossible, which is why evaluating a carrier’s financial strength before purchasing an annuity is essential, not optional.
The Rating Agencies
Four major agencies evaluate the financial strength of insurance companies. Each uses its own methodology, scale, and focus areas. Understanding who they are and what they measure helps you interpret the ratings you will encounter when comparing carriers.
A.M. Best — The Primary Source for Insurance
A.M. Best is the most important rating agency for insurance company evaluation. Founded in 1899, it is the only major agency that focuses exclusively on the insurance industry. Its Financial Strength Rating (FSR) is the single most widely cited indicator of an insurer’s ability to meet obligations to policyholders. When financial professionals say “check the carrier’s rating,” they almost always mean the A.M. Best rating.
A.M. Best evaluates four core dimensions: Balance Sheet Strength, Operating Performance, Business Profile, and Enterprise Risk Management. We cover the rating scale in detail in the next section.
S&P Global Ratings
S&P provides Insurer Financial Strength Ratings using the familiar AAA-to-D scale. S&P tends to emphasize competitive position, capital adequacy, and management quality. Their ratings carry significant weight in the broader financial market, but not all insurance carriers seek an S&P rating. If a carrier has one, it provides a valuable second opinion alongside A.M. Best.
Moody’s Investors Service
Moody’s rates Insurance Financial Strength on a scale from Aaa to C. Moody’s methodology places particular emphasis on investment portfolio quality, liability management, and the economic environment. Like S&P, Moody’s ratings are a useful cross-reference but are not universal across all carriers.
Fitch Ratings
Fitch uses an Insurer Financial Strength scale similar to S&P (AAA to D). Fitch is the smallest of the four major agencies in insurance coverage. Having a Fitch rating is a positive additional data point, but many carriers do not carry one.
| Agency | Focus Area | Top Rating | Key Strength |
|---|---|---|---|
| A.M. Best | Insurance-only specialist | A++ (Superior) | Deepest insurance industry expertise; most comprehensive coverage |
| S&P Global | Broad financial markets | AAA (Extremely Strong) | Strong competitive and management analysis |
| Moody’s | Broad financial markets | Aaa (Exceptional) | Emphasis on investment portfolio quality |
| Fitch | Broad financial markets | AAA (Exceptionally Strong) | Additional cross-reference data point |
Practical guidance: Always check the A.M. Best rating first. If the carrier also has ratings from S&P, Moody’s, or Fitch, compare them. Consistent high ratings across multiple agencies is the strongest signal. If the agencies disagree significantly, investigate why.
A.M. Best Ratings Explained
A.M. Best’s Financial Strength Rating (FSR) is the industry standard for evaluating whether an insurance company can meet its contractual obligations to policyholders. The rating reflects a comprehensive evaluation of four dimensions:
- Balance Sheet Strength: Capital adequacy, reserve quality, reinsurance programs, and asset-liability matching. This is the foundation — does the company have enough financial resources to back its promises?
- Operating Performance: Profitability, revenue stability, investment returns, and expense management. A company that consistently operates profitably is more likely to remain financially healthy.
- Business Profile: Market position, product diversification, geographic spread, and competitive advantages. A company with a strong, diversified business is more resilient to market shocks.
- Enterprise Risk Management: How well the company identifies, measures, and manages its risks. Strong risk management prevents the kind of concentrated bets that have toppled financial institutions.
| Rating | Category | What It Means |
|---|---|---|
| A++ | Superior | Strongest possible assessment of financial strength. Exceptional ability to meet policyholder obligations. Very few carriers achieve this rating. |
| A+ | Superior | Superior financial strength. Excellent capital position, consistent profitability, and strong risk management. This is the tier most top-rated carriers occupy. |
| A | Excellent | Excellent financial strength. Slightly less margin than A+ but still well-capitalized and well-managed. Very strong ability to meet obligations. |
| A- | Excellent | Excellent financial strength. The minimum rating most financial professionals recommend when selecting an annuity carrier. Strong fundamentals with adequate margin. |
| B++ | Good | Good financial strength. Adequate capacity to meet obligations, but with less margin for adverse conditions. See the B-rated section below for suitability considerations. |
| B+ | Good | Good financial strength. Viable but with limited margin. More vulnerable to economic stress, competitive shifts, or poor investment results. |
| B and below | Vulnerable | Marginal to poor financial strength. Vulnerable to adverse conditions. Significant risk that the carrier may not meet future obligations. Not recommended for annuity purchases. |
The B-Rated Question: Higher Rates, Higher Risk
Walk into any annuity rate comparison and you will notice a pattern: B++ rated carriers often appear at the top of the rate tables, offering 0.25–0.50% more than their A-rated competitors. This is not a coincidence. It is compensation for risk.
A B++ (Good) carrier is not a bad company. It has passed rigorous state regulatory requirements, maintains adequate reserves, and A.M. Best considers it financially stable. But “Good” is not “Excellent,” and the distinction matters when you are making a commitment that may last decades.
The higher rate exists because the market demands it. Institutional investors, reinsurers, and sophisticated buyers assign a higher cost of capital to B++ carriers. To attract deposits, these carriers must offer higher rates. That premium is the market’s way of pricing the additional risk — however small — that the carrier may encounter financial difficulty over the life of the contract.
When a B++ carrier may be reasonable
- Short-term contracts (3–5 years): Less time for a carrier’s financial condition to deteriorate. The rate premium may be worth it for a defined, limited period.
- Small allocation: If the B++ annuity represents 10–15% of your total portfolio, the concentration risk is low even in a worst-case scenario.
- Diversified strategy: If you are already holding annuities from A-rated carriers and adding a B++ carrier for incremental yield, the blended risk may be acceptable.
- You understand and accept the tradeoff: You have reviewed the carrier’s financials, you know the rating is lower, and you are making a conscious, informed decision.
When to avoid B++ carriers
- Large allocation: If this annuity represents a significant portion of your savings (50%+), the risk-reward tradeoff tilts against you. The extra 0.30% in rate does not compensate for the concentration risk.
- Long-term commitments (7–10+ years): More time means more uncertainty. A carrier’s financial condition can change significantly over a decade.
- Primary or sole income source: If this annuity will be your primary retirement income, the consequences of carrier financial difficulty are severe and unacceptable.
- Income annuities (SPIAs, DIAs): These involve lifetime obligations. You need the carrier to pay you for 20–30+ years. Choose the strongest carrier you can find.
- You are chasing the rate: If the only reason you are considering the B++ carrier is the rate, pause. A 0.30% difference on $200,000 is $600/year. Is that worth the additional uncertainty?
Beyond the Letter Grade
An A.M. Best rating is the most important single indicator, but it is not the only one. A thorough evaluation considers several additional metrics that provide a more complete picture of a carrier’s financial health.
COMDEX Score
The COMDEX score is a composite ranking that averages an insurer’s ratings across all major agencies (A.M. Best, S&P, Moody’s, Fitch) into a single percentile score from 1 to 100. A COMDEX score of 90 means the carrier is rated higher than 90% of all rated insurance companies. It eliminates the confusion of comparing different rating scales across agencies and gives you a quick, apples-to-apples comparison.
Benchmark: A COMDEX score of 80+ is generally considered strong. Above 90 is excellent. Below 70 warrants additional scrutiny.
Risk-Based Capital (RBC) Ratio
The RBC ratio measures how much capital an insurer holds relative to the risk it has taken on. State regulators use it to identify companies that may be undercapitalized. The ratio is expressed as a percentage of the minimum required capital:
- 300%+ — Strong: The carrier holds three or more times the minimum required capital. Substantial cushion against adverse events.
- 200–300% — Adequate: Meets regulatory thresholds comfortably but with less margin.
- Below 200% — Regulatory attention: Triggers increased regulatory scrutiny and may require the carrier to submit corrective action plans.
- Below 100% — Regulatory action: The state insurance department may take control of the company or mandate immediate corrective measures.
Years in business
Longevity is not a guarantee of future performance, but a company that has operated successfully through multiple economic cycles — including the 2008 financial crisis, the 2020 pandemic, and various interest rate environments — has demonstrated resilience. Many top annuity carriers have been in business for 100+ years.
Total assets under management
Scale provides stability. Larger carriers generally have more diversified investment portfolios, broader product lines, more sophisticated risk management, and greater financial flexibility. While size alone is not sufficient, a carrier managing $50 billion+ in assets is typically more resilient than one managing $2 billion.
Investment portfolio quality
Insurance companies invest the premiums they collect to fund future obligations. The quality of that investment portfolio directly affects the carrier’s financial health. Look for carriers with portfolios concentrated in investment-grade bonds (BBB or better) with limited exposure to high-yield, below-investment-grade, or illiquid assets. A.M. Best evaluates this as part of Balance Sheet Strength, but the data is also available in carriers’ statutory filings.
Ownership and parent company
Some annuity carriers are subsidiaries of large, diversified financial groups. The parent company’s financial strength and willingness to support the subsidiary can provide an additional layer of security. Conversely, a carrier that is a subsidiary of a financially stressed parent may face pressure to upstream capital. Understanding the corporate structure is part of a complete evaluation.
How to Evaluate a Carrier Before You Buy
Evaluating a carrier is not complicated, but it does require deliberate effort. Here is a step-by-step process anyone can follow:
- Check the A.M. Best Financial Strength Rating.
Visit ambest.com or ask your advisor. Look for the current FSR (not the credit rating, which is different). Confirm the rating is A- (Excellent) or better. Also note whether the outlook is “Stable,” “Positive,” or “Negative” — the outlook indicates A.M. Best’s view of the likely direction of the rating.
- Look up the COMDEX score.
The COMDEX score aggregates ratings from all agencies. Look for 80+. If the COMDEX and A.M. Best rating tell a consistent story (both strong), you have confirmation. If they diverge, investigate why.
- Research the carrier’s history.
How long has the company been in business? Has it maintained its rating consistently, or has it been recently downgraded? A carrier with a stable A+ rating for 20 years is a different proposition from one that was recently upgraded from B++ to A-.
- Compare with peer carriers.
If you are considering a 5-year MYGA, compare the financial strength of all carriers offering competitive rates for that term. Sometimes the highest rate comes from the weakest carrier. Sometimes a carrier with a slightly lower rate has significantly stronger financials. The comparison reveals the risk-return tradeoff.
- Ask your advisor.
A qualified annuity advisor should be able to explain the carrier’s financial strength, why they recommend that specific company, and how the carrier compares to alternatives. If an advisor cannot or will not discuss carrier strength, find a different advisor.
• What is this carrier’s A.M. Best rating and COMDEX score?
• Has the rating been stable, or has it changed recently?
• What is the carrier’s RBC ratio?
• How does this carrier’s financial strength compare to others offering similar products?
• Why are you recommending this specific carrier?
What Happens If an Insurance Company Gets Into Trouble?
Insurance company failures are rare in the United States. The regulatory framework — with mandatory reserve requirements, regular financial examinations, and early warning systems — is specifically designed to prevent them. But rare does not mean impossible, and understanding what happens when a carrier experiences financial difficulty provides important context for your decision.
The regulatory safety framework
State insurance departments monitor carriers continuously. When a company’s financial condition deteriorates, regulators intervene early — long before the company reaches the point of failure. The intervention typically follows a progression:
- Increased monitoring: The state department increases oversight frequency and may require the carrier to submit more detailed financial reports.
- Corrective orders: The regulator may require the carrier to raise additional capital, reduce risk, stop writing new business, or make management changes.
- Rehabilitation: If corrective measures are insufficient, the state may place the carrier under rehabilitation — a court-supervised process where the regulator takes control and attempts to restore the company to financial health. During rehabilitation, existing policies typically remain in force.
- Liquidation: If rehabilitation fails, the state may order liquidation — an orderly wind-down of the company. This is the last resort, and state regulators manage the process to protect policyholders.
Policyholder protection framework
State insurance regulators maintain a comprehensive framework to protect policyholders. Insurance companies are required to maintain statutory reserves, submit to regular financial examinations, and meet minimum capital requirements. When a carrier enters financial difficulty, regulators intervene early — often years before a potential failure — to protect policyholder interests.
- Annuity guarantees depend entirely on the issuing insurance company’s financial strength and claims-paying ability.
- There is no federal government guarantee backing annuity contracts.
- Recovery during insurer insolvency proceedings can take months or years.
- Protection mechanisms and coverage vary by state.
- Carrier financial strength should always be your primary consideration when purchasing an annuity.
Historical context
Major insurance company failures, while not impossible, have been remarkably rare in recent decades. When they have occurred, the resolution process has generally protected policyholders — though sometimes with delays, reduced returns, or transferred policies. In most cases, a healthy insurer has acquired the troubled company’s book of business, and policyholders have continued to receive their contractual benefits.
Notable historical examples include Executive Life Insurance Company (1991), Confederation Life (1994), and more recently, some smaller carriers that were quietly absorbed by larger competitors without public disruption to policyholders. The system has worked, but it works best when you start with a financially strong carrier in the first place.
Why diversification across carriers matters
The same principle that applies to bank deposits applies to annuities: do not concentrate all of your assets with a single institution. If you have $500,000 in annuities, splitting between two or three A-rated carriers reduces your exposure to any single company’s financial difficulties. This is especially important for larger balances and for income annuities that involve lifetime payment obligations.
Diversifying carriers also lets you access different product strengths — one carrier may offer the best MYGA rate while another has a superior FIA crediting method or income rider. The financial strength diversification is a bonus on top of product optimization.