Impact of Annuity Sales on U.S. Life and Annuity Companies
The recent surge in U.S. annuity sales has significantly impacted the reserve profiles of many U.S. life and annuity companies. This trend has increased the asset risk proportion relative to the required capital within AM Best's capital model, known as the Best’s Capital Adequacy Ratio (BCAR). As a result, some life and annuity insurers have experienced lower BCAR scores, although final balance sheet assessments do not always reflect these findings due to various influencing factors.
New players in the annuity sector are capitalizing on growth opportunities by leveraging their expertise in private credit and asset-backed securities. According to the Best’s Special Report, titled "Life/Annuity Balance Sheet Strength Driven by More Than Just BCAR," these complex assets yield higher returns but also incur increased risk-based capital charges. This has led to fluctuating BCAR figures, with average scores among rated U.S. life and annuity companies dropping to 24.5% in 2024 from a high of 32.3% in 2021, then climbing to 29.0% in 2025. Despite these changes, balance sheet strength evaluations predominantly remain in the very strong or strongest categories.
David Lopes, a senior industry research analyst at AM Best, emphasized additional factors influencing balance sheet strength, such as reinsurance dependence and financial flexibility. Though about two-thirds of AM Best's life and annuity rating units receive the top BCAR assessment, fewer than one-fifth achieve equally high final balance sheet strength ratings, highlighting the importance of these ancillary factors.
The escalation of annuity sales has led to increased use of asset-focused reinsurance and higher reinsurance cessions to affiliates, particularly offshore. Companies with top BCAR assessments but lower balance sheet strength ratings often face negative sub-assessments related to reinsurance reliance and financial flexibility, with asset quality frequently rated negatively.
The report underscores that the National Association of Insurance Commissioners’ (NAIC) Risk-Based Capital (RBC) model differs from BCAR in its purpose. While RBC primarily measures insurer solvency, BCAR evaluates the risks associated with a company's investment and insurance operations in relation to its capital reserves.
AM Best's BCAR takes into account detailed bond default assumptions, equity risk charges, and a rigorous evaluation of balance sheet-adjusted assets. These assets face high charges due to their volatility and liquidity issues. AM Best also imposes an additional 25% risk charge on affiliated bonds. If affiliated investments make up a large portion of available capital, a supplemental BCAR analysis may exclude these investments from capital metrics.
The full report is available at AM Best's website, and a video discussion can be found at here. AM Best, a leading global credit rating agency for the insurance sector, operates in over 100 countries. More information is accessible at www.ambest.com.