U.S. Annuity Sales and Its Impact on Insurance Companies

The landscape of U.S. annuity sales is reshaping reserve profiles for U.S. life and annuity insurance companies. A recent analysis by AM Best reveals an increased asset risk share in the required capital composition, as seen in the Best’s Capital Adequacy Ratio (BCAR) model, which is impacting scores for certain insurers. Although BCAR scores are crucial, they may not always align with the final balance sheet assessment due to various influencing factors.

The annuity market is experiencing a surge in new participants, many of whom possess significant investment expertise in sectors like private credit and asset-backed securities. According to the special report “Life/Annuity Balance Sheet Strength Driven by More Than Just BCAR,” companies engaged with these complex assets can offer higher yields and competitive product rates. However, this also leads to higher risk-based capital charges, raising asset risk and resulting in weaker BCAR outcomes as asset risk expands more swiftly than capital reserves.

AM Best's research indicates a decline in average BCAR scores for rated U.S. life/annuity insurers, falling to 24.5% in 2024 from a five-year high of 32.3% in 2021, before improving to 29.0% in 2025. Despite many insurers being rated from strong to the strongest in balance sheet strength by the end of 2025, this highlights the importance of other factors in balance sheet assessments.

David Lopes, a senior industry research analyst at AM Best, underscored the range of considerations affecting balance sheet strength beyond BCAR. He noted that aspects like reinsurance reliance, financial flexibility, asset quality, and internal capital are influential. Lopes remarked, “Nearly two-thirds of AM Best’s life/annuity rating units have a BCAR assessment of strongest, but less than one in five have the same final balance sheet strength assessment, demonstrating these other factors' impact.”

The boom in annuity sales has also increased the use of asset-intensive reinsurance solutions, predominantly in offshore locations, and reinsurance ceded to affiliates. Among companies where the BCAR assessment is strongest, but the balance sheet strength seems weaker, over 20% faced negative sub-assessments regarding reinsurance reliance, financial flexibility, and internal capital framework. Additionally, asset quality frequently received more negative assessments than positive ones.

For further insights, the complete report is available for purchase, and a video discussion on the findings can be accessed through the AM Best website.