AM Best: Life/Annuity Balance Sheet Strength Driven by More Than Just Best’s Capital Adequacy Ratio

Why It Matters

Lower BCAR scores highlight heightened sensitivity to market stress, prompting insurers and investors to scrutinize asset‑risk strategies and capital buffers more closely.

Key Takeaways

• Annuity growth draws entrants with private‑credit expertise, raising asset risk.
• BCAR differs from RBC: forward‑looking balance‑sheet strength metric.
• Higher‑yield, complex assets depress industry average BCAR scores.
• AM Best evaluates liquidity, ALM, leverage beyond BCAR alone.
• Lower BCAR indicates greater sensitivity, not immediate capital weakness.

Summary

The video discusses AM Best’s latest analysis of life and annuity balance‑sheet strength, focusing on the Capital Adequacy Ratio (BCAR) and how recent market dynamics are reshaping risk profiles. Stephen Vincent explains that BCAR, unlike the NAIC’s Risk‑Based Capital (RBC) system, is a forward‑looking, value‑at‑risk measure designed to gauge a company’s ability to absorb tail‑risk events, while RBC is primarily a backward‑looking solvency indicator.

Key insights reveal that BCAR is only one component of AM Best’s broader assessment, which also weighs asset‑liability management, financial leverage, asset quality, liquidity, and reinsurance usage. The surge in annuity sales has attracted new players with deep expertise in private credit and asset‑backed securities, pushing the industry toward higher‑yield, more complex assets. This shift has exerted downward pressure on average BCAR scores in 2024, reflecting increased asset risk and capital intensity rather than outright capital erosion.

Vincent notes, “BCAR measures the balance sheet’s ability to withstand increasing risk in the tail of the distribution,” while Lopes adds, “The influx of entrants leveraging private‑credit and structured securities is structurally lowering scores but does not necessarily signal capital deterioration.” These remarks underscore that the metric captures heightened sensitivity to market stress, not immediate weakness.

For insurers and investors, the declining BCAR trend signals a need to monitor asset‑risk exposure and maintain robust capital buffers. Relying solely on BCAR could be misleading; a holistic view of liquidity, leverage, and ALM practices remains essential for assessing long‑term financial strength.

Original Description

Stephen Vincent, associate director, and David Lopes, senior industry research analyst, both of AM Best, discuss a recent Best's Special Report that finds risk-based capital asset risk increases as companies shift to annuities.

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