Best’s Special Report: Analysis Shows Drastic Shift in Life Insurance Reserves Toward Annuity Products, and a Slide in Credit Quality

OLDWICK, N.J.--(BUSINESS WIRE)--A new AM Best analysis reveals that funds held to back individual annuity policies now account for over 36% of the U.S. life/annuity insurance segment’s overall reserves, which is up from 32% prior to the financial crisis of 2008. It illustrates a shift from traditional, defined benefit retirement and income protection approaches toward strategies more reliant on investment performance to drive yield. Over that same timeframe, a larger portion of these annuity reserves have shifted to companies with an AM Best Credit Rating that is nearly two notches lower, when viewed on a comparative, weighted basis.

The Best’s Special Report, titled “Credit Quality of Annuity Reserves Declined from 2007 to 2025 on the Credit Ratings Scale,” notes that approximately one-third of the segment’s annuity reserves are tied to the balance sheets of 95 companies that have a lower Long-Term Issuer Credit Rating now than they did in 2007. Publicly traded companies account for almost half of these reserves, but privately held companies saw the largest average downgrade.

“This has been driven by newer entrants that have been assigned lower ratings, as well as established life/annuity companies that have been downgraded,” said Erik Miller, senior director, AM Best.

Many larger companies, and often private-equity/asset manager-backed (PE/AM) insurers have utilized offshore reinsurance, sometimes with affiliated reinsurers for capital efficiency and tax benefits. Cross-border reinsurance introduces operational complexity and opaqueness, which may complicate analysis, according to the report.

Several factors have contributed to a diminished balance sheet quality that has driven life/annuity ratings lower since 2007, including but not limited to a heightened reinsurance dependence; a lower quality of reinsurance; weaker financial flexibility; pressured internal capital, a deterioration in the quality of assets; and improper asset liability management.

The report also notes that private equity/asset manager-backed insurers have entered the market in the past five years as annuity premiums surged, using higher yields earned from their private credit portfolios to offer elevated crediting rates on product offerings and add market share. Multi-year guarantee annuity (MYGA) products have offered a path for PE/AM-backed insurers to profit off interest rate spread while also matching similar duration liabilities to their structured asset duration and hedging duration risk as needed.

“Interest rates have begun to decline, and new growth may begin to taper off,” said Jason Hopper, associate director, AM Best. “The MYGA space is already very competitive, market share is tighter, and we may be approaching a time when it may be too late for new entrants to capitalize.”

The report suggests that more limited growth prospects would force companies to take market share from others, whether through more competitive rates and bids or a distribution force that offers more options and solutions. “This could either dampen earnings or require material investment in new capabilities, ultimately pressuring profitability and in turn, balance sheet strength,” Hopper said.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=363867.

To view a related video on this report, please visit http://www.ambest.com/v.asp?v=ambannuityhopper426&AltSrc=182 .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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