Growing use of asset-intensive reinsurance is one of the factors changing the credit risk profile of the US life and annuity sector, according to a new report by ratings agency AM Best.

Booming annuity sales are reshaping insurers’ reserve profiles and increase exposure to investment-related risks, the report suggests.

Titled “Life/annuity balance sheet strength driven by more than just BCAR”, the report finds that strong annuity growth has pushed many insurers towards more complex investment strategies and heavier use of reinsurance structures to manage capital demands.

AM Best said asset risk now represents a larger share of required capital in its Best’s Capital Adequacy Ratio model, contributing to weaker BCAR scores for some life and annuity writers.

The average BCAR score for rated US life/annuity companies fell to 24.5 per cent in 2024 from a five-year high of 32.3 per cent in 2021, before recovering modestly to 29 per cent in 2025.

The decline comes as insurers increasingly allocate to private credit, asset-backed securities and other higher-yielding investments to meet annuity liabilities. While these assets can enhance returns, they also carry higher risk-based capital charges, the AM Best analysts noted.

Bermuda’s burgeoning life reinsurance sector draws much of its business from American life insurers. As of last September, the island’s life reinsurers had assets under management of $1.52 trillion, with 82 per cent of ceded business sourced from the US.

Asset-intensive reinsurance involves the transfer of blocks of annuities to reinsurers, who take on both the asset and liability risks. Regulators in the US, UK, Japan and Europe have all expressed concerns over the liquidity and transparency of reinsurers’ private-credit investments.

With several of Bermuda’s life reinsurers owned by or affiliated with private equity firms, concerns have also been raised about the potential for a conflict between the interests of policyholders and investors.