Shifts in U.S. Life and Annuity Market Revealed by AM Best
A recent analysis by AM Best has revealed major shifts within the U.S. life and annuity market. The report shows that assets supporting individual annuities now compose over 36% of the industry's total reserves, up from 32% before the 2008 financial downturn. This trend marks a shift from traditional defined-benefit retirement options towards more investment-driven approaches.
AM Best also points out a reduction in the credit quality of annuity reserves. The report, titled "Credit Quality of Annuity Reserves Declined from 2007 to 2025 on the Credit Ratings Scale," highlights that reserves are now concentrated among insurers with credit ratings nearly two levels lower than before. Approximately one-third of annuity reserves are held by 95 insurers that have experienced credit rating declines since 2007, with privately owned insurers facing the most significant downgrades.
Another key finding is the increased use of offshore reinsurance arrangements by insurers backed by private equity or asset managers. While these structures offer capital efficiency and tax advantages, they can complicate transparency and regulatory compliance requirements within the market.
Several factors contribute to weakened balance sheets since 2007, including reliance on reinsurance, declining reinsurance partner quality, and reduced financial flexibility. The rise of private equity-backed insurers leveraging private credit investments to boost competitiveness is also noted. Multi-year guaranteed annuities (MYGAs) help insurers align asset durations with liabilities, aiding in risk management amid fluctuating interest rates.
Looking ahead, AM Best forecasts potential slower growth in the industry, which may intensify competition, prompting firms to capture market share from rivals rather than relying on increasing demand. This scenario could lead to aggressive pricing strategies and broader product offerings.
Industry Insight
Erik Miller, Senior Director at AM Best, indicated that lower ratings for new entrants and downgrades of established firms are key influences in the market. Jason Hopper, Associate Director at AM Best, expressed concerns about how declining interest rates and competition in the MYGA market might hinder growth opportunities for new players. Hopper warned that this environment could impact profitability and balance sheet strength, urging firms to invest in developing innovative capabilities.