The latest research released by credit rating agency AM Best shows that the U.S. life and annuity (L/A) insurance industry continues to demonstrate overall financial strength, but the composition of its capital base is becoming less robust.
The agency attributes this shift to insurers’ increasing reliance on soft forms of capital and the expanded use of affiliated and offshore reinsurance structures.
AM Best noted in its annual review and preview Best Market Segmentation report that “the U.S. life and annuity industry continues to shift more focus toward annuities.” AM Best explained that while premium growth remains solid, particularly in the annuity segment, the pace of expansion is expected to slow over the medium term.
The continued emphasis on annuity products has reshaped competitive dynamics, with new entrants seeking to gain a foothold alongside established carriers. This comes against the backdrop of further consolidation in distribution channels and an ongoing push for AI-led operational initiatives.
The agency also noted a significant shift in insurance companies’ investment strategies. Portfolios are increasingly tilted toward private credit, reflecting the comparable duration profile of related liabilities and the pursuit of higher returns. “This new investment landscape is largely untested by large-scale credit or liquidity events,” commented Erik Miller, senior director at AM Best, noting potential vulnerabilities that could arise during tight market conditions.
Compared with annual growth of more than 10% between 2021 and 2024, growth in forgone reserves has slowed to about 7% based on the 2025 forecast. AM Best expects this slowdown to continue as the industry recalibrates its capital management practices.
Subsidiary and offshore reinsurance arrangements continue to serve as a mechanism to improve capital efficiency, diversify risk and smooth earnings volatility. Companies backed by private equity sponsors and asset managers have had a significant impact on these developments.
“AM Best does not view offshore reinsurance exclusively as a negative; however, we expect improvements, governance and transparency, and improvements in collateral to remain a focus,” Miller added, highlighting the agency’s expectations for enhanced oversight and disclosure standards.
The report further notes that jurisdictions such as Bermuda and the Cayman Islands have historically positioned themselves as tax-neutral domiciles, offering reinsurers limited or no corporate income, capital gains or withholding taxes. However, Bermuda recently imposed a 15% corporate income tax on large multinationals, narrowing the fiscal distinction between offshore and onshore regimes.
In terms of finance, as of the first three quarters of 2025, the L/A sector’s ending capital and surplus were US$539 billion, an increase of 4% from the same period last year. The improvement was driven by industry net profit of $25 billion and realized gains of $14 billion, partially offset by lower asset valuation reserves.
The industry’s profitability remains stable and mortality trends are expected to continue to improve. However, broader economic uncertainty and falling interest rates could impact returns on new business, particularly if competition intensifies.
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