Annuity sales growth, capital management strategies involving reinsurance, and increased competition from new market entrants are influencing the global life and annuity reinsurance sector, according to a recent report from AM Best.
The report highlights a continued rise in reinsurance leverage among US cedents, with offshore transactions playing a significant role. Bermuda has become a key jurisdiction for these activities, with the Cayman Islands also seeing increased use.
This trend is linked to higher demand for retirement solutions and the use of reinsurance as both a capital and risk management tool.
The reinsurance leverage ratio for the US life and annuity industry reached 328% at the end of 2024, up from nearly 200% a decade earlier, reflecting a greater reliance on third-party reinsurance by US carriers relative to their capital and surplus.
Edward Kohlberg, director at AM Best, noted, “With higher interest rates driving robust annuity growth in the past few years, the amount of annuity reserves has expanded by more than 10% in each of the last four years, and ceded reserves have doubled from 2016 to 2024.”
He added that the strong growth in annuities is expected to persist, and more companies may turn to reinsurers to manage both growth and capital levels.
AM Best previously maintained a “stable” outlook for the US life and annuity insurance segment at the end of 2024, citing strong capitalization, robust topline growth, and steady profitability. While annuity sales have surged, life insurance sales have moderated this year and are expected to continue this trend, even as demand grows among the aging population.
“As the offshore reinsurance model continues to be profitable, there remain concerns due to the rapid growth and evolving regulatory scrutiny,” said Stratos Laskarides, senior financial analyst at AM Best.
Laskarides also observed that despite annuities being capital-intensive, asset managers have so far supported the sector’s expansion by providing necessary capital, rather than restricting growth through significant dividends.
AM Best also addressed the investment risks faced by reinsurers, particularly as private equity-backed reinsurers and asset managers become more prominent in the market. Reinsurers owned by asset managers are reportedly more willing to take on investment risk, leveraging their parent companies’ experience in structured products, mortgages, private credit, and other alternative assets.
The report also highlights a significant increase in the use of sidecars among US life and annuity insurers. Since 2021, the number of companies utilizing these structures has tripled, with about a dozen insurers using them by the end of 2023.
Ceded reserves to sidecars have increased threefold over two years, as insurers seek alternative ways to manage capital amid rising premium volumes. This trend is particularly notable among annuity-focused companies, especially those backed by private equity or asset managers.
AM Best anticipates that competition for capital solutions, the complexity of products, and the use of reinsurance as a strategic capital management tool will continue to shape the industry. The report suggests that these factors will remain central to the sector’s development in the near future.
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