U.S. Life Insurance Sector Insights: Growth Amidst Challenges
The U.S. life insurance sector is witnessing unprecedented capital levels and record annuity sales, even as AM Best and global regulators voice concerns over the concentration in private credit and declining capital quality. These factors could potentially affect industry performance moving forward. AM Best retains a stable outlook for the sector but foresees slower growth rates. According to LIMRA data, U.S. annuity sales are projected to reach $461.3 billion by 2025, nearly doubling over five years, with registered index-linked annuities experiencing a 20% annual increase.
Industry capital and surplus reached $538.8 billion in the third quarter of 2025, marking a 4.7% increase from the previous year, with projections pointing to $564.3 billion by 2026. Despite these gains, concerns about declining capital quality persist. Factors like soft capital, offshore reinsurance, and linked reinsurance arrangements contribute to these worries. The sector's reinsurance leverage ratio reached 328% by the end of 2024, a notable rise from around 200% a decade earlier. AM Best's Edward Kohlberg emphasized that ceded reserves have doubled from 2016 to 2024.
The employment of sidecars within the industry has surged, with AM Best's 2024 data revealing that the number of insurers using sidecars tripled since 2021. Reserves ceded to these structures increased threefold in just two years. A Federal Reserve staff note from March 2025 cautioned against complex structures resulting from partnerships between life insurers and asset managers, which could obscure true leverage.
The Bank for International Settlements reported in 2025 a trend among private equity-backed insurers towards higher-risk investments, including structured products and affiliated assets. Meanwhile, investments in private credit and alternative assets have also grown, with Conning research showing that allocations to asset classes like private placements, mortgage loans, real estate, and Schedule BA comprised 38% of portfolios in 2024, up from 30% in 2018. Private placements alone rose from 13% to 19%.
Moody's reported that holdings in private letter-rated, Z-rated, and Level 3 securities amounted to $685 billion by the end of 2024, representing 18% of the industry's $3.8 trillion fixed-income portfolio. Approximately 10% of these securities are below investment grade, twice the proportion found in broader portfolios. AM Best characterized the private credit market as untested in the event of a significant credit or liquidity crisis.
Furthermore, problem mortgage loans have nearly doubled since 2023, with 90-day delinquencies climbing to 4.1% in the third quarter of 2025. Despite expectations for ongoing premium growth in 2026, AM Best warns of increased competition if the pace slows. The Peak 65 demographic trend indicates approximately 4.1 million Americans will turn 65 each year through 2027, sustaining demand. However, the continuation of this trend against rising structural risks remains uncertain.