US life and annuity insurers are leaning harder than ever on assets that cannot be priced against a live market quote. A new special report from AM Best, published August 05, 2026, puts a number on how far that shift has gone — and lays out the valuation and liquidity risks that come with it, particularly for insurers backed by private equity firms and asset managers.
For rating analysts, underwriters and institutional investors tracking the sector, the report is a reminder that balance-sheet strength in life and annuity insurance increasingly hinges on judgment calls made inside the company, not on prices set by an open market. That distinction rarely shows up in a headline solvency ratio, but it shapes how quickly — and how accurately — a carrier can reprice its book when conditions turn.
A Decade of Doubling Down on Illiquid Bonds
US insurers’ investments in Level 3 assets more than doubled in the last 10 years to $592 billion in 2025, with the life/annuity segment driving the growth, according to the AM Best report. The figure captures a structural shift in how the industry deploys capital, away from publicly traded bonds and toward instruments that trade rarely, if at all.
Level 3 is the accounting classification reserved for holdings that cannot be marked to observable prices. Investments that classify as Level 3 come with some valuation and liquidity risk, as they are not actively traded, and therefore lack observable market inputs such as quoted prices and comparable market transactions. These investments are typically illiquid, and valuation is based on complex internal financial modeling that relies on various assumptions and forecasts. That reliance on model-based pricing rather than market quotes is precisely what draws scrutiny from rating agencies and analysts whenever confidence in credit markets wavers.
Why the Life/Annuity Segment Dominates the Numbers
The growth is not evenly spread across the industry. According to AM Best, the life/annuity segment accounts for 92% of the industry’s Level 3 bond holdings. Within that segment, the concentration is further skewed by asset type. Nearly 75% of life/annuity insurers’ Level 3 holdings are in corporate bonds, other financial asset-backed securities, project finance, equity-backed securities and bank loans.
“Illiquid investments are better aligned with life/annuity insurers’ liabilities as opposed to health and property/casualty insurers that have greater liquidity needs due to the shorter duration of liabilities,” said Kaitlin Piasecki, industry research analyst, AM Best.
The Private Equity Concentration Problem
Private equity/asset manager-backed companies have a greater concentration of affiliated Level 3 bonds when compared with other organization types, such as mutual or publicly traded insurers. Private equity/asset manager-backed insurers draw upon their parent company’s investment expertise to invest in more complex and harder-to-value assets. The pattern is not marginal, and it points to a structural feature of how PE-backed balance sheets are built rather than a one-off allocation decision.
Private equity/asset manager-backed companies account for six of the top 10 companies with the highest Level 3 bond exposure, a distribution AM Best says reflects investment strategies built around less liquid, model-valued instruments.
“Use of affiliated asset managers or companies that originate and structure underlying funds that the insurance company purchases can increase counterparty, transparency and valuation risks, and could result in reputational harm if valuation is found to be overinflated in a credit event,” said Jason Hopper, associate director, Industry Research and Analytics, AM Best.
That concentration is already drawing scrutiny beyond ratings commentary. Elsewhere in the market, federal subpoenas facing PE-backed life insurers Delaware Life and Clear Spring show how quickly questions about affiliated-asset strategies can move from analyst notes to law-enforcement interest.
Valuation Methodology and Credit Quality Under the Microscope
The fair value of approximately 70% of Level 3 bonds held by life/annuity insurers were determined by the reporting entity or a third party contracted by the reporting entity, up from 60% in 2016. That shift matters because self- or affiliate-determined valuations remove an independent check exactly where AM Best says risk is concentrated.
Nearly 90 percent of the industry’s Level 3 investments are rated NAIC-1 or NAIC-2, indicating relatively high credit quality. The credit-quality figures offer some reassurance, but they do not resolve the structural question AM Best raises: ratings reflect current assumptions, and Level 3 valuations are themselves built on assumptions rather than observable trades.
Context: A Wider Pattern Under Scrutiny
The Level 3 report lands alongside other recent AM Best commentary pointing to a common theme: opacity is becoming a rating consideration in its own right. The agency’s separate warning on AI data-centre exposure raised similar concerns about insurers underwriting risks that are difficult to model against historical experience. In the reinsurance market, Lincoln’s cession of guaranteed universal life reserves to Talcott shows how life insurers are also restructuring balance-sheet risk through large block transactions — another area where valuation assumptions carry outsized weight. Taken together, the pattern points to a life/annuity sector increasingly dependent on judgment-based pricing, whether for illiquid bonds, novel underwriting exposures, or reinsurance transfers.
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.
