Annuity Carrier Risk — AM Best's Warning on Insurer Debt

By Editorial Team

Published April 10, 2026 · Updated May 5, 2026

A new AM Best report finds that life/annuity insurers now hold more high-risk debt than they did before the 2008 financial crisis — and the capital buffers backing your guarantees are thinner. Here’s what it means for cap rates, carrier selection, and the annuity you already own.

On April 10, 2026, AM Best released a report with a headline that should matter to everyone who owns an annuity or is shopping for one. The ratings agency found that the investment portfolios of life and annuity insurers now carry more risky debt than they did in 2007 — the year before the worst financial crisis since the Great Depression — and that capital buffers are slightly thinner than they were going into that crisis.

This is not a prediction of catastrophe. The annuity industry navigated 2008 without the widespread failures that hit banks. But AM Best’s warning is a data-grounded signal that the risk profile of the industry has structurally shifted, and that shift has direct consequences for the people whose retirement income depends on these carriers.

What the Numbers Actually Say

AM Best’s October 2025 report, “Managing Risk is Critical as Private Credit Holdings Increase,” documents a decade-long transformation in how life and annuity insurers invest the premiums you pay them.

The core finding: private placement bond holdings — debt that is less liquid, less transparent, and harder to sell in a crisis — have more than doubled over the last ten years while publicly traded investments remained relatively flat. By the end of 2024, these non-public bonds topped $940 billion, accounting for 24% of the industry’s bond portfolio and 17% of total invested assets.

To put that in context: in 2014, illiquid non-144a private placements made up 16% of bonds. By 2024, that figure had risen to 24%. The growth rate of the most illiquid category — structured non-mortgage-backed securities — was 13% compounded annually over the decade, versus 5% for traditional direct lending.

A parallel Moody’s report from November 2025 found that in just the first half of 2025, illiquid private debt comprised about 23% of the $522 billion in bonds purchased by insurance companies — meaning the pace is accelerating, not slowing.

The Capital Buffer Problem

The second part of AM Best’s concern is less about the absolute level of private credit and more about the cushion available if things go wrong.

In 2024, the industry’s capital and surplus relative to its annuity reserve commitments was slightly lower than it was in 2007. That margin matters enormously in a stress scenario: it is the financial shock absorber between a portfolio loss and a carrier’s ability to honor its obligations to policyholders.

Seven companies in AM Best’s dataset had below-investment-grade private placement holdings that exceeded their entire capital and surplus — meaning a severe enough credit event in their private portfolios could theoretically wipe out their capital cushion entirely. AM Best names several of these: CL Life and Annuity Insurance Company (BIG private placements at 324% of C&S), SILAC Insurance Group (162%), Fidelity & Guaranty Life Group (108%), and Athene US Life Group (91%), among others.

Not all of these are equally alarming in context — Athene is a major, heavily monitored PE-backed carrier, and SILAC is a smaller player. But the range of exposure across the industry is wide, and it is not always obvious from a carrier’s AM Best letter rating alone.

Private Equity Ownership: The Architecture Behind the Numbers

To understand why these numbers moved the way they did, you have to understand the structural shift in who owns annuity carriers.

Over the past decade, private equity firms have acquired or taken significant stakes in a substantial portion of the annuity industry. The names are now familiar: Apollo owns Athene. KKR controls Global Atlantic. Blackstone has strategic partnerships with F&G Annuities and Corebridge. Brookfield acquired American Equity Investment Life in 2024.

The business logic is straightforward: a PE firm acquires a life insurer to gain access to a massive, low-cost pool of capital — policyholder premiums. It then redeploys that capital into higher-yielding private credit investments, often originated by its own affiliated asset management platform. The spread between what the PE firm’s credit vehicles earn and what the carrier owes policyholders is where the profit lives.

In a stable credit environment, this works. The Chicago Fed documented that PE-owned life insurers earn roughly 80 basis points more on their private placements than comparable public bonds — and that yield advantage is partly what allows them to offer more competitive annuity products and grow market share faster than traditional carriers.

The problem, as the Retirement Income Journal has described it, is what analysts are calling the “Bermuda Triangle” structure: an asset manager owns the insurer, which reinsures its liabilities to an affiliated offshore reinsurer, while the asset manager continues to control the investment portfolio. This allows the insurer to report lower liabilities (because they’ve been reinsured) while the actual credit risk remains with the system. F&G’s statutory surplus, for instance, runs at approximately 2.4% of liabilities — compared to an industry average of 7.2%.

The Retirement Income Journal noted this week that Apollo, KKR, and F&G have all seen their share prices fall significantly from late 2024 highs — Apollo from $177 to around $104, KKR from $165 to around $90 — as investor skittishness about private credit exposure and the leverage embedded in these structures grows.

What “Private Letter Ratings” Mean for You

One detail in the AM Best report that deserves more attention than it typically gets: nearly half of the industry’s private credit investments carry “private letter ratings” (PLRs) — ratings assigned not by the public agencies (Moody’s, S&P, Fitch) but by the asset managers or originators themselves, submitted to the NAIC for verification.

PLR-rated structured securities, AM Best found, showed meaningfully different credit quality distributions than publicly rated equivalents. While 76% of PLR-rated structured non-MBS bonds were designated NAIC-1 (highest quality), only 65% of publicly rated equivalents reached that threshold — a difference that raises questions about whether private ratings are being used to achieve more favorable capital treatment than the underlying credit quality would warrant.

Colm Kelleher, chairman of UBS, called this practice “ratings arbitrage” in November 2025, comparing it to what banks did with subprime loans before 2008.

What This Means for Cap Rates

The connection between insurer investment strategy and the cap rate on your FIA is more direct than most buyers realize.

Carriers fund index options — the mechanism that allows them to credit you index-linked returns — using the spread between what they earn on their bond portfolio and what they owe on fixed rates. When interest rates are high and portfolio yields are strong, the options budget is larger and caps go higher. When portfolio yields compress or hedging costs rise, caps get cut at renewal.

The option budget implied by current 1-year Treasury yields and SPX implied volatility sits around 4.88%, which translates to a theoretical cap of roughly 9.28–9.47% for a standard S&P 500 annual point-to-point strategy. That’s consistent with what we’re seeing in the market right now.

But here’s the risk: if a carrier’s private credit portfolio takes losses — even unrealized ones that pressure capital ratios — the carrier may need to conserve capital. One lever they control is the options budget. Cutting that budget means cutting your cap at next renewal. The contractual minimum cap in most FIAs is 1–2%, which gives carriers enormous latitude.

American Life & Security Corp, which currently leads the market with a 10.50–11.50% cap on 10-year terms but carries an AM Best rating of only B++, appears in AM Best’s data with below-investment-grade private placements at 86.5% of capital and surplus. That combination — aggressive cap rate + elevated credit risk — is exactly the profile worth scrutinizing before committing to a 10-year surrender period.

What This Means for Agent Commissions

This is a part of the story that rarely gets discussed in the consumer press: the relationship between carrier financial health, cap rates, and agent compensation is triangular, and the stresses run in multiple directions.

When carriers are flush and competing aggressively for premium dollars, they raise caps and pay higher commission rates to agents. The current environment — where PE-backed carriers have used private credit yields to outcompete traditional carriers — has pushed commission rates on FIAs to historically elevated levels.

If private credit stress forces carriers to reduce their options budgets (lowering caps) and simultaneously tighten operating margins (reducing commissions), the most vulnerable agents are those whose books are concentrated in the aggressive, higher-paying PE-backed carriers. Some may redirect business toward more conservatively capitalized carriers even if those carriers’ products are less competitive on paper — because the long-term relationship risk of placing clients in a carrier that later faces credit difficulties is severe.

For buyers, the implication is to ask the question that most sales conversations skip: is the agent recommending this carrier because it genuinely represents the best risk-adjusted value, or because it pays a higher commission and is willing to offer a higher headline cap?

How to Think About This If You Own an Annuity

None of this means your annuity is in danger. The insurance regulatory framework — state guaranty associations, RBC requirements, NAIC oversight — provides meaningful protection that did not exist in the same form for bank depositors in 2008.

But it does mean a few things worth keeping in mind.

Know your carrier’s AM Best rating and watch for changes. Rating downgrades are the clearest early signal that a carrier is under financial pressure. A downgrade from A to B++ is not an emergency, but it narrows the margin for error.

Understand that cap rates at renewal are discretionary. The carrier can lower your cap to the contractual minimum (typically 1–2%) at any renewal. This is a contractual right, not a failure. If your cap was set in a high-rate, high-options-budget environment and conditions change, expect renewal compression.

Check your state’s guaranty association limits. In most states, coverage runs to $250,000 in annuity value per carrier. If you have more than that with a single carrier, you have uninsured exposure.

Concentration matters. If multiple annuities you own are backed by carriers affiliated with the same PE sponsor — or are reinsured through the same offshore platform — you have more correlated risk than the individual AM Best ratings suggest.

The 2008 crisis, by historical accident, arrived before the PE acquisition wave in insurance. The next serious credit downturn will not have that timing advantage. What remains genuinely unknown is how concentrated private credit portfolios will perform in a prolonged recession with rising defaults and illiquid secondary markets. AM Best is asking the right questions. It is worth understanding why.

The information above is based on publicly available AM Best reports, Moody’s research, SEC filings, and industry publications. It does not constitute financial or legal advice. Always consult a licensed professional before making annuity purchasing decisions.