According to a newly released study by the credit rating agency AM Best, the US life and annuity (L/A) insurance sector continues to demonstrate overall financial strength, yet the composition of its capital base is becoming less robust.
The agency attributes this shift to insurers’ increasing reliance on softer forms of capital, together with expanded use of affiliated and offshore reinsurance structures.
In its annual Review & Preview Best’s Market Segment Report, “US Life and Annuity Industry Continues to Shift More Focus to Annuities,” AM Best explains that while premium growth has remained solid, particularly within the annuity segment, it expects the pace of expansion to ease over the medium term.
The sustained emphasis on annuity products has reshaped competitive dynamics, with newer entrants seeking to establish a foothold alongside long-standing carriers. This is unfolding against a backdrop of further consolidation within distribution channels and a growing push towards artificial intelligence-led operational initiatives.
The agency also points to a marked transformation in insurers’ investment strategies. Portfolios are increasingly weighted towards private credit, reflecting the comparable duration profile of underlying liabilities as well as the pursuit of higher returns. “This new investment landscape is largely untested from a large-scale credit or liquidity event,” commented Erik Miller, Senior Director, AM Best, noting the potential vulnerabilities that could emerge under stressed market conditions.
Growth in ceded reserves has moderated, slowing to approximately 7% based on 2025 projections, compared with annual increases of more than 10% between 2021 and 2024. AM Best anticipates that this deceleration will persist as the sector recalibrates its capital management practices.
Affiliated and offshore reinsurance arrangements continue to serve as mechanisms for enhancing capital efficiency, diversifying risk and smoothing earnings volatility. Companies supported by private equity sponsors and asset managers have materially influenced these developments.
“Offshore reinsurance is not viewed exclusively as a negative by AM Best; however, we expect improvement and governance and transparency, and improved collateralisation will remain a focus,” Miller added, underscoring the agency’s expectations around stronger oversight and disclosure standards.
The report further observes that jurisdictions such as Bermuda and the Cayman Islands have historically positioned themselves as tax-neutral domiciles, offering limited or no corporate income, capital gains or withholding taxes for reinsurers. However, Bermuda’s recent introduction of a 15% corporate income tax for large multinational enterprises narrows the fiscal distinction between offshore and onshore regimes.
Financially, the L/A segment recorded ending capital and surplus of $539 billion through the first three quarters of 2025, representing a 4% increase on the same period a year earlier. This improvement was driven by industry net income of $25 billion and realised gains of $14 billion, partially offset by lower asset valuation reserves.
Profitability across the sector remains steady, and mortality trends are expected to continue improving. Nevertheless, broader economic uncertainty and declining interest rates may weigh on returns from new business, particularly as competition intensifies.
