A new report from credit rating agency AM Best highlights significant changes in the U.S. life and annuity industry.
The assets backing personal annuity products now account for more than 36% of the industry’s total reserves, up from 32% before the 2008 financial crisis, according to AM Best.
AM Best explains that this growth reflects a broader shift away from traditional defined benefit retirement solutions towards a model that relies more on investment-driven returns.
AM Best further reported that the overall credit quality of these annuity reserves has declined over the same period. On a weighted comparison basis, reserves are increasingly concentrated among insurers with AM’s best credit ratings nearly two notches below historical levels.
In its special report, “From a credit rating perspective, the credit quality of annuity reserves has declined from 2007 to 2025” About a third of total annuity reserves are currently held by 95 insurance companies, whose long-term issuer credit ratings have been declining since 2007, AM Best said.
AM Best noted that while listed insurers accounted for nearly half of these provisions, average downgrades were most pronounced among private companies.
AM Best has also observed that many large insurance companies – particularly those backed by private equity firms or asset managers – are increasingly turning to offshore reinsurance arrangements. In some cases, these measures involve affiliated reinsurers and are used to improve capital efficiency and achieve tax advantages.
However, AM Best warns that such cross-border structures may introduce additional complexity and reduce transparency, which may make risk assessment more difficult.
AM Best said a number of factors had contributed to an overall deterioration in the industry’s balance sheet strength since 2007.
These include increased reliance on reinsurance, declining quality of reinsurance counterparties, reduced financial flexibility, pressure on internally generated capital, declining asset quality and challenges in effective asset liability management.
AM Best also highlighted the growing number of insurance companies backed by private equity and asset managers, which have expanded rapidly over the past five years as annuity demand surged.
AM Best explains that these companies use the higher yields from private credit investments to offer more competitive credit rates and capture more market share. Products such as multi-year guaranteed annuities (MYGA) play a central role in enabling insurers to benefit from spreads while aligning asset duration with long-term liabilities and managing duration risk.
Looking ahead, AM Best said slower industry growth is likely to intensify competition, requiring insurers to win business from rivals rather than rely on expanding demand.
AM Best concluded that this could lead to more aggressive pricing strategies, stronger tendering activity and broader distribution capabilities to offer a wider range of product solutions.
Erik Miller, senior director at AM Best, commented: “This is driven by new entrants being assigned lower ratings as well as established life/annuity companies being downgraded.”
“Interest rates have begun to fall and new growth may begin to taper off,” added Jason Hopper, associate director at AM Best. “Competition in the MYGA space is already fierce, market share is tighter, and we may be approaching an era where new entrants are capitalizing.”
“This could depress earnings or require significant investment in new capabilities, ultimately putting pressure on profitability and therefore balance sheet strength,” Hopper said.
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