Best’s Special Report: Strong Annuity Market Growth Shifting Life/Annuity Insurers’ Risk Profiles

OLDWICK, N.J.--(BUSINESS WIRE)--Strong U.S. annuity sales have shifted the reserve profile for many U.S. life/annuity companies, with asset risk forming a greater share of required capital composition in AM Best’s capital model, Best’s Capital Adequacy Ratio (BCAR), and leading to weaker scores for some life/annuity companies. At the same time, according to a new report, BCAR scores have shown to not always correlate with the end-result balance sheet assessment, highlighting the impact of other factors on the overall analysis.

Many new participants have entered the annuity market to capitalize on the growth, with some companies having extensive investment expertise in private credit and asset-backed securities. According to the Best’s Special Report, “Life/Annuity Balance Sheet Strength Driven by More Than Just BCAR,” these more-complex assets earn higher yields that can be used to offer more competitive credit rates on products, but come with higher risk-based capital charges, increasing the level of asset risk. As risk profiles expand faster than capital buffers, weaker BCARs have resulted for some companies. AM Best’s analysis found that average BCAR scores at the value-at-risk 99.6% level for rated U.S. life/annuity companies fell to 24.5% in 2024 following a five-year high of 32.3% in 2021, though the average BCAR saw an uptick in 2025 to 29.0%. As most balance sheet strength assessments were in the very strong or strongest categories as of year-end 2025, this market dynamic highlights the importance of additional factors that AM Best analyzes when determining balance sheet strength.

“Other areas AM Best analyzes when determining balance sheet strength include reinsurance dependence, financial flexibility, internal capital and quality of assets, among others,” said David Lopes, senior industry research analyst, AM Best. “Nearly two-thirds of AM Best’s life/annuity rating units have a BCAR assessment of strongest, but less than one in five have a same final balance sheet strength assessment, highlighting the impact of these other factors.”

The record annuity growth has resulted in heightened use of asset-intensive reinsurance, particularly to offshore jurisdictions, as well as an uptick in reinsurance ceded to affiliates. For companies with the strongest BCAR assessment but a weaker balance sheet strength assessment, more than one in five of those companies had a sub-assessment of negative for reinsurance dependence, as well as financial flexibility and internal capital models. Quality of assets also saw more negative than positive sub-assessments.

Other takeaways from the report include:

• The NAIC’s RBC model is a gauge of insurer solvency and that differs in purpose from BCAR, which provides a quantitative measure of the risks inherent in a company’s investment and insurance operations relative to its available capital.
• Asset risk charges under AM Best’s BCAR include granular bond default assumptions by rating and maturity, higher equity risk charges and strict treatment of balance sheet-adjusted (BA) assets, which receive elevated charges because of volatility, opacity, and liquidity concerns.
• AM Best assesses an additional risk charge of 25% for affiliated bonds, which have seen growing allocations. If investments in affiliates represent a material portion of available capital, AM Best may perform a supplemental BCAR analysis that removes the affiliated investments from available and required capital.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=364643.

A video discussion of this report is available at http://www.ambest.com/v.asp?v=ambla526.

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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