Something fundamental has shifted inside the balance sheets of America's life insurance companies. Over the past two decades, the industry has moved steadily away from the conservative bond portfolios that once defined it, and toward a complex web of private credit, offshore reinsurance arrangements and illiquid alternative assets. Two major reports published last week lay out the consequences of that journey in stark terms - and neither makes for comfortable reading.
For policyholders, and for the regulators charged with protecting them, the question is no longer theoretical: how much risk is too much?
The scale of what has changed becomes clear the moment you look at the reserve data. Annuity obligations - the promises insurers have made to pay out retirement income - now absorb more than a third of the entire US life and annuity sector's reserves, a share that has grown by four percentage points since before the 2008 financial crisis. That alone would not be alarming. What gives regulators pause is what has happened to the quality of the companies carrying those obligations. Measured on a weighted, comparative basis, the carriers backing annuity reserves today hold AM Best credit ratings that have slipped by nearly two full notches since 2007.
The deterioration is concentrated but widespread enough to be systemic. AM Best identified 95 companies whose creditworthiness has fallen since 2007; together they hold roughly a third of the sector's annuity reserves. It is private companies that have suffered the sharpest rating declines on average, though the sheer scale of publicly traded operators means they account for close to half of the downgraded reserve pool by value.
“This has been driven by newer entrants that have been assigned lower ratings, as well as established life/annuity companies that have been downgraded,” said Erik Miller, senior director, AM Best.
The shift reflects a deliberate strategic choice by many carriers, particularly those backed by private equity and asset management firms. These companies entered the annuity market aggressively over the past five years, using the higher yields available from private credit portfolios to offer elevated crediting rates on products such as multi-year guarantee annuities, known as MYGAs. The strategy worked: they gained market share. But it came at a cost to balance sheet quality that is now showing up in the ratings data.
The role of private equity in reshaping the life insurance sector has become one of the defining debates in financial regulation. Firms including Apollo, Blackstone and KKR have built or acquired significant insurance operations, using the steady flow of annuity premiums - what the industry calls permanent capital - to fund their investment strategies.
The returns have been impressive. By investing in private credit, including illiquid instruments that carry higher yields than publicly traded bonds, these operators have been able to outcompete traditional insurers on the rates they offer customers. But critics, including researchers at the Centre for Economic and Policy Research, have raised pointed questions about what lies beneath. A March 2026 analysis found that roughly a fifth of the investments held by Athene, Apollo's insurance arm, and KKR's Global Atlantic now consist of loans made to affiliated funds - a form of self-dealing that regulators acknowledge is difficult to evaluate given the opacity of the underlying assets.
AM Best's diagnosis of what has driven the decline reads like a checklist of compounding vulnerabilities: carriers leaning more heavily on reinsurance, and on lower-quality reinsurance at that; balance sheets with less room to absorb shocks; asset portfolios that have drifted toward complexity; and in some cases a mismatch between the duration of liabilities and the assets meant to fund them. The report is careful not to name names, but its description maps closely onto the business model that PE-backed insurers have pursued. Many of those carriers have routed risk through affiliated offshore reinsurers in Bermuda and the Cayman Islands — jurisdictions chosen partly for their lighter capital requirements and tax treatment. The practical effect, the report notes, is that the resulting structures are considerably harder for outside analysts to assess.
Fixed index annuity sales reached $127.9 billion in 2025, making the category the fastest-growing in the annuity market for the third consecutive year.
Against this backdrop, the National Association of Insurance Commissioners has been quietly overhauling the tools at its disposal. A March 2026 report by S&P Global Market Intelligence documented the scope of these changes, which represent the most significant restructuring of the NAIC's investment oversight apparatus in years.
The scale of the problem is difficult to quantify precisely, because the NAIC's existing reporting system was designed around asset categories rather than how investments were originated — a distinction that matters enormously when trying to distinguish liquid, straightforward bonds from illiquid private credit instruments. The most reliable signal available is the share of insurers' bond holdings carrying private placement identifiers, which has climbed from 18.3 percent of total admitted bonds in 2021 to 23.4 percent in 2025. Even that measure overstates comparability: it bundles genuinely complex, hard-to-trade instruments alongside plain-vanilla private bonds that institutional investors move freely between themselves.
On March 5, the NAIC adopted new reporting requirements designed to provide more granular classification of private investments. Transparency about how life insurers manage their investment portfolios is a key priority for regulators this year, NAIC President Scott White told S&P Global Market Intelligence.
The structural response has been significant. The NAIC dissolved its longstanding Valuation of Securities Task Force at the start of this year, replacing it with a new commissioner-level Invested Assets Task Force and three supporting specialist groups. The division of labour reflects how seriously the NAIC is taking the challenge: one group focuses on investment analysis, a second on how investments get designated for capital purposes, and a third - the newest - on scrutinising the credit rating providers whose assessments sit at the foundation of the entire capital framework. At the task force's inaugural meeting in March, PricewaterhouseCoopers presented early work on a due diligence framework intended to bring greater rigour to how those rating agencies are evaluated.
Significantly, regulators now have the ability to challenge and override credit ratings that they believe do not accurately reflect the risk of a given security - a power that previously did not exist. Carrie Mears, an investment specialist with the Iowa Department of Insurance and Financial Services, described the goal as making oversight more nimble and responsive. Her group is also looking closely at a surge in residential mortgage loan investments by life insurers, calling it a growth area warranting investigation.
There is a sense in parts of the industry that the favourable conditions that made the private-credit-funded annuity boom possible may be shifting. Interest rates have begun to decline from their recent peaks. The MYGA market is, by AM Best's assessment, already highly competitive, with tighter margins and less room for new entrants. Jason Hopper, an associate director at AM Best, noted that the sector may be approaching a point where the window for profitable entry has effectively closed.
That creates its own risks. Faced with slower organic growth, carriers may feel pressure to pursue market share through more aggressive pricing, or to reach further along the risk curve in search of yield. AM Best's report warns that either path could weaken profitability and, in turn, balance sheet strength - exactly the metric that has already been trending in the wrong direction for much of the sector.
“The MYGA space is already very competitive, market share is tighter, and we may be approaching a time when it may be too late for new entrants to capitalize,” said Jason Hopper, associate director, AM Best.
Goldman Sachs Asset Management's annual global insurance survey, published in late March and drawing on responses from 434 insurance company officers, found that 35 percent of insurers expect to raise allocations to investment-grade private placements in the coming year, with around a third planning to increase exposure to senior direct lending. The appetite, in other words, has not abated.
For industry professionals, the implications of these trends are multilayered. On the investment side, the case for private credit remains compelling: the asset class offers yield premium, duration-matching characteristics well-suited to life insurers' long-dated liabilities, and, as Goldman Sachs noted, the ability to be opportunistic across credit cycles. These are genuine advantages that explain why allocations have risen so steadily.
But the AM Best data introduces a discipline that enthusiasm can obscure. Lower credit ratings, greater offshore complexity, heavier reinsurance dependence and opaque asset-liability arrangements are not abstract concerns. They are the specific factors that have historically preceded stress events in the insurance sector. When they cluster together in a significant portion of the industry simultaneously, the systemic dimension of the risk becomes harder to dismiss.
For regulators, the challenge is structural as much as technical. The NAIC is a standard-setter rather than a direct supervisor; actual enforcement rests with individual state insurance departments, whose capacity and appetite for confrontation with well-capitalised private equity operators varies considerably. The new reporting requirements and the power to challenge credit ratings are meaningful steps. Whether they are sufficient to keep pace with the complexity of the assets they are now being asked to oversee remains an open question.
For policyholders - the millions of Americans who hold annuity contracts in anticipation of retirement income - the regulatory architecture and its limitations are largely invisible. What is visible is the rate on offer and the name of the company providing it. The gap between those two data points and the condition of the balance sheet behind them is precisely what regulators, and now AM Best, are working to close.
Sources: AM Best Special Report, 'Credit Quality of Annuity Reserves Declined from 2007 to 2025 on the Credit Ratings Scale' (April 10, 2026); S&P Global Market Intelligence, 'US insurance regulators pulling back the curtain on private credit' (March 31, 2026); NAIC Invested Assets Task Force; Goldman Sachs Asset Management Global Insurance Survey (March 2026); Centre for Economic and Policy Research, 'You Bet Your Life Insurance: Private Equity Comes For Your Annuity' (March 2026).
