U.S. annuity sales reached $104.6 billion in Q1 2026, marking the tenth consecutive quarter above the $100 billion threshold. The full-year 2025 total of $464.1 billion set a fourth straight annual record per LIMRA data. But beneath the headline volume story, AM Best has published analysis in 2026 documenting a parallel trend that deserves careful actuarial scrutiny: the reinsurance leverage ratio for the life sector ended 2024 at 328%, up from roughly 200% a decade earlier, and ceded general account reserves doubled between 2016 and 2024. This article examines whether the sustained annuity boom is masking a deterioration in the capital quality supporting policyholder obligations.

The Volume Story: LIMRA Q1 2026 Annuity Sales

From tracking LIMRA quarterly annuity data since the post-pandemic surge began, the stabilization above $100 billion per quarter represents a structural shift rather than a cyclical peak. The Q1 2026 results, while 2% below Q1 2025, still reflect extraordinary demand across every major product category.

Product TypeQ1 2026 SalesYoY ChangeNote
Fixed-Rate Deferred (FRD)$34.0B-16%Still one-third of total market
Fixed Indexed (FIA)$26.6B-4%Losing share to RILAs
Registered Index-Linked (RILA)$21.2B+21%30th consecutive growth quarter
Traditional Variable (VA)$16.1B+9%3rd consecutive growth quarter
Single Premium Immediate (SPIA)$3.7B+22%Steady rates sustain demand
Deferred Income (DIA)$1.0B+6%Niche but growing
Total$104.6B-2%10th straight $100B+ quarter

Bryan Hodgens, senior vice president and head of LIMRA research, framed it directly: "The threshold for annuity sales appears to be stabilized above $100 billion, highlighting the continued interest in principal protection and guaranteed income." RILA products continue to be the growth engine, with LIMRA forecasting 2026 RILA sales to exceed the record set in 2025. The Peak 65 demographic wave, combined with sustained interest rates above 4%, is creating structural demand for accumulation and income products that shows no sign of reverting to pre-2022 levels.

The individual annuity sales increase above 20% annually from 2022 through 2024, per the ALIRT Life Composite, represents the fastest sustained growth period in modern annuity history. Even as fixed-rate deferred products pull back from their 2025 highs (a predictable consequence of the yield curve normalizing), indexed and income-oriented products are absorbing the shift.

The Capital Quality Story: AM Best's Warning

AM Best published two reports in early 2026 that, taken together, describe a structural shift in how the life insurance industry finances its obligations. The first, released in April, documented a drastic shift in life insurance reserves toward annuity products and a slide in credit quality. The second, reported by Insurance Business Magazine in May 2026, flagged growing capital concerns masked by the record sales environment.

The core findings carry direct implications for reserving and capital adequacy analysis:

  • Reserve concentration: Individual annuity reserves now exceed 36% of total U.S. life/annuity segment reserves, up from 32% before the 2008 financial crisis.
  • Credit quality decline: On a reserve-weighted basis, the average issuer credit rating across the annuity block has fallen nearly two notches since 2007. Approximately one-third of annuity reserves are tied to 95 companies whose long-term issuer credit ratings have declined over that period.
  • Reinsurance leverage: The sector's reinsurance leverage ratio ended 2024 at 328%, up from roughly 200% a decade earlier. Ceded reserves doubled from 2016 to 2024.
  • Sidecar proliferation: The number of companies utilizing reinsurance sidecars tripled since 2021, with ceded reserves to these structures increasing threefold over two years.

AM Best flagged "heightened reinsurance dependence, weaker financial flexibility, pressured internal capital, and deterioration in asset quality" as concerns that the volume story does not capture. Industry capital and surplus reached $538.8 billion as of Q3 2025, up 4.7% from the prior year-end, with AM Best estimating the figure will hit $564.3 billion in 2026. The headline surplus number looks healthy. The composition of that surplus is where the concern lies.

The PE-Backed Insurer Dynamic

The most significant structural force behind both the volume surge and the capital quality shift is the rise of private equity-backed life insurers. Harvard Business School research cited by AM Best found that PE-backed insurers controlled approximately 25% of all U.S. individual annuity liabilities by 2024 and accounted for 35% of new fixed and fixed indexed annuity sales, up from just 7% in 2011.

The operating model is straightforward: PE sponsors acquire or form life insurance platforms, transfer existing blocks of business to affiliated offshore reinsurers (typically domiciled in Bermuda), and invest the backing assets through affiliated asset management arms that specialize in private credit, CLOs, and structured products. The gross yield on these portfolios runs 40 to 80 basis points above a traditional investment-grade corporate bond portfolio, and the regulatory capital requirement under the offshore jurisdiction is often lower than the onshore equivalent.

Apollo's Athene and KKR's Global Atlantic are the largest examples, each holding approximately one-fifth of their investment portfolios in loans to affiliated funds as of year-end 2024. Affiliated investments among life/annuity insurers surged more than 17% in 2024 alone to exceed $373 billion, part of a trend averaging 13% annual growth over six years. Nearly 70% of offshore reserves were ceded to affiliated reinsurers, with firms backed by asset managers or PE sponsors responsible for 46% of those affiliated offshore transactions.

In a poll conducted by AM Best, 90% of insurance executives cited capital efficiency as the primary reason for using offshore reinsurance. This is not inherently problematic. Reinsurance is a legitimate capital management tool, and Bermuda's regulatory framework (particularly under the Bermuda Monetary Authority's equivalence regime) provides meaningful oversight. The concern arises when the reinsurance arrangements create "operational complexity and opaqueness," as AM Best described it, and when the counterparty in the reinsurance transaction is an affiliate of the cedant, introducing concentrated counterparty risk that may not be fully visible in statutory financial statements.

Investment Portfolio Shifts: The Illiquidity Premium Trade-Off

The asset side of the ledger has shifted in parallel with the liability growth. According to NAIC capital markets data, industry-wide allocations to private placements, mortgage loans, real estate, and Schedule BA asset classes have risen to 38% of total life insurer portfolios, up from 30% in 2018. The composition of that shift is instructive:

  • Private placements: Now 19% of portfolios, up from 13% in 2018. Private bonds accounted for 45.9% of total bond holdings ($1.72 trillion) at year-end 2024.
  • Mortgage loans: Reached a new high of 14.0% of total assets in 2024 (15% of unaffiliated assets).
  • Asset-backed securities: 12.9% of bond portfolios at year-end 2024, up from 12.1% at year-end 2023, continuing an upward trend.
  • Corporate credit: 43% of unaffiliated assets for life insurers at year-end 2024.

From tracking the ratio of ceded reserves to direct reserves across the top 25 life writers since 2018, the acceleration since 2021 stands out as the most significant structural shift in life insurer capital composition in a generation. General account reserves ceded by ALIRT Life Composite insurers more than doubled between 2020 and 2025, coinciding precisely with the period when PE-backed carriers expanded their share of the annuity market most aggressively.

The actuarial challenge is clear. Higher-yielding, less liquid assets generate better spread income under normal conditions, which supports higher credited rates on annuity products and drives market share gains. As we analyzed in our earlier coverage of AM Best's credit quality findings, multi-year guarantee annuity products have offered a particular path for PE-backed insurers to profit from the interest rate spread while matching similar duration liabilities to structured asset durations. But these assets also carry higher credit risk, lower market liquidity, more complex valuation requirements, and greater sensitivity to economic downturns. The illiquidity premium that boosts reported yields in calm markets can become an illiquidity penalty when markets dislocate.

Offshore Reinsurance at Scale

Total offshore life reinsurance reserves transferred by U.S. insurers surpassed $1.1 trillion by the end of 2024, according to NAIC capital markets data. U.S. life insurers ceded $2.4 trillion of reserves in total during 2024, meaning nearly half of all ceded reserves now flow to offshore jurisdictions. Bermuda accounts for more than 40% of total ceded reserves and over 60% of newly originated offshore reinsurance cessions.

BILTIR, the Bermuda life reinsurance trade association, now represents over 70 companies supporting more than $1 trillion in life insurance reserves. The Bermuda Monetary Authority has tightened its oversight framework in response to the growth, including enhanced liquidity ratio requirements and scenario-based capital testing. But the pace of reserve growth has outstripped the expansion of regulatory infrastructure, a pattern that regulators and rating agencies have noted with increasing frequency.

The concern is not that offshore reinsurance is inherently risky. Patterns we have seen in recent regulatory discussions suggest the concern is more specific: when the cedant, the reinsurer, the asset manager, and the investment originator are all affiliates within the same corporate group, the diversification benefit that reinsurance is supposed to provide becomes attenuated. In a stress scenario where the asset manager's private credit portfolio experiences elevated defaults, the losses would flow through the affiliated reinsurer back to the cedant's balance sheet, with the reinsurance providing less protection than a third-party arm's-length transaction would.

NAIC Regulatory Responses

The NAIC has launched several parallel workstreams addressing the capital quality concerns AM Best identified. Taken individually, each is incremental. Taken together, they represent the most comprehensive regulatory tightening of life insurer capital standards since the risk-based capital framework was last overhauled.

CLO Capital Factor Overhaul

The NAIC is developing an NAIC-specific loss model for CLOs that will replace the current approach of relying on credit rating agency designations for risk-based capital charges. The Academy of Actuaries is working toward implementing changes to the CLO RBC methodology effective 2026, with proposed factors needing to have been exposed by April 30, 2026. However, the project has already been extended by one year, and if proposals are not timely adopted, implementation will be delayed to year-end 2027. For life insurers with significant CLO allocations, particularly PE-backed carriers, the potential increase in CLO capital charges could meaningfully compress the spread available for credited rates and shareholder returns.

Collateral Loan Look-Through

The Life RBC Working Group has re-exposed a proposal for differentiated capital charges on collateral loans. The American Council of Life Insurers proposed a look-through approach with capital charges ranging from 10% to 90% based on the specific type of assets securing the loan and the level of overcollateralization, rather than applying a single uniform charge of 30% to all collateral loans backed by equity interests. Implementation has been delayed to 2027, giving the industry additional time to prepare but also extending the period during which the current, arguably inadequate, capital treatment remains in effect.

Negative IMR Framework

INT 23-01, the temporary guidance allowing insurers to admit net negative interest maintenance reserves up to 10% of adjusted capital and surplus, has been extended through December 31, 2026. Regulators have adopted a new IMR template requiring insurers to verify that bond sale proceeds are being recycled back into qualifying fixed income investments before adding to a net negative IMR balance. This provision is designed to prevent insurers from selling bonds at a loss to raise liquidity and then deploying the proceeds into riskier, higher-yielding assets without adequate capital recognition.

SSAP 52 FABN Disclosure

Revisions to SSAP No. 52, covering funding agreement-backed notes and related structures, were exposed for public comment through May 1, 2026. The proposed disclosure requirements would capture collateral pledged under funding agreement-backed loans and repurchase agreements, providing regulators and the public with significantly greater visibility into these funding structures. The Macroprudential Working Group expects adoption for year-end 2026 financial statement disclosure.

Actuarial Guideline 55

Adopted by the NAIC in August 2025, AG 55 requires appointed actuaries to analyze reinsurance collectability and counterparty risk as part of asset adequacy testing. This is a direct response to the growth in affiliated reinsurance: if the reinsurer's ability to pay depends on the performance of assets originated by an affiliated asset manager, the appointed actuary must explicitly evaluate whether the reinsurance arrangement provides genuine risk transfer under adverse scenarios.

Stress Scenario: What a Credit Dislocation Would Expose

The interaction between elevated reinsurance leverage, illiquid investment portfolios, and affiliated structures creates a vulnerability that is difficult to quantify under normal conditions but becomes visible under stress. Consider a scenario in which credit spreads widen 200 to 300 basis points over a six-month period, comparable to the spread widening observed in Q1 2020 or the sustained dislocation of 2008-2009.

Asset valuation. Publicly traded bonds reprice immediately through market value movements, but private placements, mortgage loans, and structured products reprice with a lag and with less transparency. For insurers holding 38% of their portfolios in less liquid asset classes, the gap between book value and realizable market value could be significant. Under statutory accounting, many of these assets are carried at amortized cost, which delays recognition of impairments. But asset adequacy testing under VM-20 requires stochastic projections that incorporate credit-related cash flow deterioration, meaning the appointed actuary must grapple with the valuation uncertainty even if the balance sheet does not yet reflect it.

Reinsurance collectability. If the assets backing the affiliated reinsurer's reserves experience elevated defaults or liquidity stress, the reinsurer's ability to meet its obligations to the cedant comes into question. Under AG 55, the appointed actuary must evaluate this scenario explicitly. For a company with a reinsurance leverage ratio of 328%, a 10% impairment of the reinsurer's asset portfolio could consume a substantial share of the capital cushion that the reinsurance arrangement was supposed to provide.

Liquidity demands. Annuity products with surrender features create liquidity exposure. If policyholders surrender contracts during a period of elevated market volatility (seeking principal protection, ironically, the same motivation that drove them to annuities in the first place), insurers must liquidate assets to meet cash demands. For portfolios tilted toward illiquid holdings, the forced-sale losses amplify the credit losses already hitting the portfolio. The NAIC's negative IMR template requirement addresses a specific version of this dynamic: the concern that insurers might sell bonds at a loss and reinvest in riskier assets to generate the yield needed to sustain credited rates during a downturn.

Feedback loops. In a severe scenario, the combination of asset impairments, reinsurance collectability concerns, and policyholder surrenders could trigger rating agency downgrades, which would further increase surrender activity (as policyholders respond to perceived insurer weakness) and further impair the value of affiliated reinsurance arrangements (as the reinsurer faces its own rating pressure). This self-reinforcing dynamic is the core systemic concern that regulators and rating agencies are attempting to address through the various workstreams described above.

Historical Parallels: 2008 and Now

The comparison to pre-2008 structured capital arrangements in the life insurance sector is instructive, though imperfect. Total losses during 2008 by U.S. life insurers reached $154.9 billion, against aggregate statutory capital of $266.9 billion at year-end 2007. The primary drivers were concentrated in a small number of firms that had extended into structured finance well beyond traditional insurance risk.

AIG's collapse was driven by its credit default swap portfolio and securities lending operations, not by its core insurance underwriting. The parallel today is not in the specific instruments but in the structural pattern: a small number of large, complex entities using affiliated financial structures to transform insurance company balance sheets into vehicles for higher-yielding (and higher-risk) investment strategies. Then it was CDS on CDOs. Now it is affiliated reinsurance of annuity reserves into private credit portfolios.

The differences from 2008 are meaningful. Current regulatory oversight, particularly through the NAIC's various capital and disclosure workstreams, is more proactive than pre-crisis regulation was. The Bermuda Monetary Authority has strengthened its supervisory framework substantially. The risk is more distributed across a larger number of PE-backed carriers rather than concentrated in a single entity. And the underlying assets (private credit, CLOs, mortgage loans) are fundamentally different from the synthetic CDO exposures that destroyed AIG.

But this continues a trend we have observed across multiple cycles: the specific instruments change, while the structural incentives to use affiliated entities and complex financial arrangements to optimize regulatory capital remain constant. The post-2022 higher-rate environment provided favorable conditions for this expansion. The question is what happens when those conditions reverse.

Why This Matters for Actuaries

For pricing actuaries working on annuity products, the capital quality story has direct implications for credited-rate assumptions, competitive positioning analysis, and product design. When competitors are offering higher credited rates funded by higher-yielding (but riskier) investment portfolios backed by affiliated reinsurance structures, the pricing actuary must decide whether to match those rates (accepting higher risk), differentiate on product features, or accept lower market share.

For reserving and valuation actuaries, the LDTI environment already imposes greater transparency on long-duration contract accounting. AG 55's requirements for evaluating reinsurance collectability in asset adequacy testing add a new dimension to the appointed actuary's responsibilities. The question is not just whether the reserves are adequate in isolation, but whether the reinsurance arrangements counted as offsetting those reserves will perform as expected under stress.

For enterprise risk management actuaries, the reinsurance leverage ratio of 328% represents a sector-wide exposure that warrants explicit attention in own-risk and solvency assessments. The concentration of ceded reserves in affiliated structures, combined with the illiquidity of the backing assets, creates a tail risk that standard stress scenarios may not fully capture.

For regulators, the convergence of the CLO capital overhaul, collateral loan look-through, negative IMR framework, and SSAP 52 disclosure workstreams reflects recognition that the current capital framework was not designed for an industry where nearly half of ceded reserves flow offshore and 38% of investment portfolios sit in less liquid asset classes. The regulatory response is measured and deliberate, but the pace of industry transformation has been rapid.

The headline annuity sales numbers will continue to generate positive coverage. The underlying capital quality trend deserves equal attention.

Further Reading

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