The Hidden Risk Beneath High-Yield Annuities: What AM Best's Watchlist Means for You and Your Clients

Let’s not sugarcoat it—some annuity carriers may be sitting on a solvency time bomb, and AM Best just lit the warning flare.

In a July 2025 update, AM Best placed several smaller life insurers on a watchlist due to concentrated exposure in long-duration, rate-sensitive annuities—particularly multi-year guaranteed annuities (MYGAs). The reason? A potentially volatile shift in the interest rate environment could turn attractive yields into unsustainable liabilities.

For financial professionals, this isn’t just a ratings footnote. It’s a call to re-examine how we choose carriers, build client trust, and position products that promise guarantees—but come with risks buried in their balance sheets.

What’s Happening: AM Best’s Warning in Plain English

AM Best flagged insurers with heavy allocations to fixed-rate annuity liabilities—specifically those tied to MYGAs and fixed deferred contracts—whose assets may not match their long-term obligations if rates drop sharply. These insurers, mostly small to midsize, rely on narrow spreads between investment returns and what they owe policyholders. When that spread compresses, the business model starts to wobble.

If the Fed pivots dovish (and the bond market’s recent moves suggest it might), these insurers could find themselves underwater—unable to meet policyholder guarantees without eroding their capital base.

Insurance Business America added fuel to the fire by spotlighting increasing regulatory scrutiny on these insurers’ reserve adequacy, asset-liability matching, and hedging practices.

Why This Matters for Financial Professionals

Your due diligence just became mission-critical. If you’re recommending fixed annuities based solely on yield, you might be ignoring the financial foundation your client’s guarantee is built on.

Let’s break down what this means for your practice:

1. High-Yield MYGAs May Mask High-Risk Carriers

Many of the “top-of-sheet” MYGA rates are coming from insurers now under pressure. Why? Because aggressive rates often rely on thin capital cushions and yield-hungry portfolios. A market shift could destabilize these promises.

Don’t chase yield without context. The extra 40 basis points may not be worth the long-term risk to your client—or your reputation.

2. Asset-Liability Mismatch Is Real

Insurers backing long-term guarantees with short- or intermediate-term investments may struggle to maintain promised returns if reinvestment rates fall. This isn't theory—it’s 2008 in slow motion, but on the annuity side.

Understand what backs the guarantee. Ask wholesalers or BGAs about asset duration and reserve policy. If they can’t answer, walk away.

3. Regulators Are Watching—and You Should Be Too

The NAIC is tightening focus on policyholder behavior modeling, early surrender assumptions, and reserves under stress testing. Advisors who get ahead of these shifts by educating clients will build trust and credibility.

Proactive disclosure beats reactive defense. Clients deserve to know how guarantees work—and what could make them wobble.

Key Data Highlights

• $106B in annuity sales Q2 2025, with MYGAs leading the charge (LIMRA).

• Several insurers under review hold 70%+ of liabilities in fixed-rate annuities, some with <2% capital buffers.

• AM Best modeled scenarios where a 150–200 bps drop in rates would result in negative spreads on up to 40% of in-force books.

• CME FedWatch now projects a 65% chance of a rate cut by Q4 2025.

How to Strengthen Your Practice Right Now

1. Prioritize Carrier Strength Over Yield Flash
Stick with insurers who have diversified books, deep capital reserves, and transparent risk management policies. Don’t be afraid to pass on the “top yield” when it comes with bottom-tier stability.

2. Build a Carrier Vetting Framework
Develop a checklist for every carrier: AM Best rating trend, capital reserve ratio, asset duration, surrender charge structure, and regulatory activity. Treat it like a fiduciary filter—even if you’re not technically bound to one.

3. Educate Clients on the “How,” Not Just the “What”
Walk clients through how annuity guarantees are funded. Explain that their 5.5% MYGA doesn’t sit in a vault—it’s backed by an insurer managing market risk. This builds transparency and trust.

4. Diversify Product Strategy
Don't rely on just one type of annuity to do all the heavy lifting. Mix MYGAs, FIAs, and even income annuities to balance risk, return, and flexibility—especially if interest rates change course.

5. Stay Ahead of Regulatory Shifts
Monitor NAIC updates and be ready to pivot if new disclosure or reserve rules come down. Compliance-savvy advisors will outlast those who cling to outdated models.

Final Thought: Guarantees Aren’t Guaranteed Without Due Diligence

It’s easy to fall in love with the simplicity of MYGAs. Fixed term. Fixed rate. Set it and forget it.

But we can’t forget the golden rule: The strength of an annuity is only as strong as the insurer behind it.

AM Best’s watchlist is a wake-up call. Let’s use it not to panic, but to raise our standards, educate our clients, and protect the integrity of the very products we believe in.

Because belief is good. But belief backed by scrutiny? That’s what separates good advisors from great ones.