Increasing surrenders on individual annuities drove a 27% decline in pre-tax net operating profitability despite record sales in recent years, according to a new AM Best report.

The Best’s Special Report, “Individual Annuity Surrenders Dent Operating Profitability,” states that surrenders increased by 21% to $280 billion in 2024, up from $232 billion in 2023, as higher interest rates and policyholders’ desire for better performing products have led to the uptick. Overall, the individual annuity composite’s net operating gain fell to $14.9 billion in 2024, compared with $20.5 billion in 2023.

“With the heightened surrender activity over the last few years, the industry now has nearly half of its individual annuity reserves within surrender charge protection or can’t be surrendered at all, compared with an average of 37% between 2014-2021,” said Kaitlin Piasecki, industry research analyst, Industry Research and Analytics, AM Best.

On the heels of strong momentum in 2023, annuity sales were solid in 2024, led by variable annuity products such as RILAs. The rapid growth has heightened competition, including new private equity/asset manager-owned insurers looking to capitalize on the difference between the cost of liabilities (i.e., crediting rates on products) and potential investment returns. Many companies in the individual annuity composite also have been utilizing reinsurance to manage their growth and capital levels. According to the report, in the last five years, the amount of reserves ceded to reinsurers has increased by 86%, with the biggest portion moving offshore to affiliates. Private equity/asset manager-owned insurers are the lead drivers behind these assets moving offshore. These companies also drive the trend of utilizing offshore affiliates for reinsurance.

“Ceding to offshore affiliated reinsurers allows insurers to manage capital, transfer risk and save on taxes, but AM Best believes that this reduces transparency and is generally a credit negative for the market,” said Jason Hopper, associate director, Industry Research and Analytics, AM Best. “Private equity/asset manager-owned insurers now account for about one-quarter of the companies in the individual annuity market, nearly one-third of gross premium written in 2024, but also more than half of the reserves ceded.”

The report notes that insurers with private equity/asset manager parents have higher allocations to private placements, asset-backed securities, mortgage loans and affiliated investments than other organizational structures. Insurers also have increased allocations to private credit, which allows for flexibility of structures, although these instruments are bespoke, less transparent and less liquid, which results in a higher risk premium for investors.

Looking ahead, while annuity companies’ investment incomes were in a favorable position at the beginning of 2025, yields have since declined and equity markets have given back some of their previous returns as economic uncertainty has grown.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=355271.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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