A forensic accountant's read on the fastest-growing blind spot in life and annuity balance sheets — what the aggregate numbers show, what the carrier-level numbers show, and why the second set is worse.
Most of the warnings you have read about life and annuity carriers in the last two years have been about assets. Private credit. Commercial mortgage-backed securities. Structured paper that isn't residential and isn't commercial and isn't easy to value. The financial press is right to be worried about all of it, and I share the concern.
But assets, at least, can be looked at. They are itemized. Every bond, every stock, every mortgage is listed in the statutory annual statement. If a category is overvalued, an examiner can write it down and we can all see what happened.
The thing that worries me more is on the other side of the balance sheet, and you cannot look at it at all.
I have spent the last several months pulling the December 31, 2025 statutory filings for every U.S. life and annuity carrier and ranking them by one measure: how much they have ceded to reinsurers they own. Forty of them account for nearly all of it. What follows is what the aggregate shows. The forty names, and each one's individual numbers, are in the report at the end — and I'll explain why the individual numbers are the part that should concern you.
What surplus actually is
Start with the buffer, because everything else depends on it.
As of December 31, 2025, roughly 700 U.S. life and annuity carriers reported about $10 trillion in assets. Subtract total liabilities and you get a combined surplus of $658 billion. Surplus is not a reserve account and it is not cash. It is arithmetic: assets minus liabilities. It is the entire distance between a company keeping its promises and a state insurance department taking it over, because an insurer is not permitted to run a negative surplus.
Roughly six and a half cents of buffer per dollar of assets, supporting obligations that in many cases run past the middle of this century.
Real reinsurance, and the other kind
Reinsurance is legitimate and necessary. A carrier cedes a block of business to a reinsurer, spreads its risk, and sleeps better. If the block carries $10 billion in liabilities, roughly $10 billion in assets goes with it, because the reinsurer is an independent party with its own capital at risk and will not accept the promises without the money to fund them. Surplus isn't much affected. This has been working since the days of insuring ships bound for the spice trade, and it should keep working.
Affiliated reinsurance is a different animal. Here the carrier or its parent forms its own reinsurance company and cedes to itself.
Now look at what happens to the numbers. Suppose you run a for-profit carrier with shareholders who expect the dividend to grow every year. Growing it requires a bigger surplus. You can build surplus with earnings or with fresh paid-in capital — both slow, both expensive. Or you can stand up a captive reinsurer in a jurisdiction with more flexible capital requirements, cede it $10 billion in liabilities, and send only $6 billion in assets, because the entity on the other side is managed by people who report to you.
Four billion dollars of surplus, created in an afternoon. Nobody contributed a dollar.
Why nobody can check the work
Every one of the 51 U.S. regulatory jurisdictions imposes two requirements on material affiliate transactions. First, the terms must be fair and reasonable — handled as though the counterparty were a sophisticated, informed, independent entity. Second, and this is the one that has teeth: "The books, accounts and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the nature and details of the transactions."
Each party. Both ends.
We can't see the other end. These arrangements run to captives in a handful of U.S. states and to offshore locations including Bermuda, Barbados and the Caymans. Some U.S. jurisdictions advertise that their records are not available even by subpoena. The affiliated reinsurers file no public statutory annual statement, so there is no document to examine and no way to determine how well funded they are.
It is my professional opinion that these arrangements do not satisfy either statutory requirement, notwithstanding that regulators have largely permitted them.
The aggregate — and why it is the flattering version
Here is where the numbers land.
Industry-wide, in-house affiliated reinsurance totals more than $1.5 trillion as of December 31, 2025. Fewer than 200 of the 700-odd carriers use it at all, and most of those use it modestly. Concentrate on the forty heaviest users and you find $1.3 trillion — about 85 percent of the industry total — sitting on forty balance sheets.
Those forty carriers hold $182 billion in combined surplus. They account for roughly 28 percent of the industry's surplus while carrying 85 percent of its affiliated reinsurance.
Seven dollars of ceded liability for every dollar of buffer. If the recoverables from those black boxes turn out to be uncollectible by 14 percent, the combined surplus of all forty is gone. At 20 percent, the shortfall exceeds their combined surplus by roughly $80 billion.
Now, seven to one is the average, and averages are merciful. They are also not what your client owns. Your client owns one carrier, and the individual carriers on this list do not cluster around the average — they spread out badly. Several of the forty carry more than fifty dollars of ceded liability for every dollar of surplus. The most extreme runs past one hundred and seventy-five to one.
I am not going to name those carriers in a blog post. But I have named all forty in the report, each with its reported surplus set beside its total ceded, so you can run the ratio yourself and see where any carrier you place business with actually falls. [Get the report here.]
The report names all forty, ranked by total affiliated reinsurance ceded, with each carrier's reported 2025 surplus beside it. Seven pages. Written for advisors, not actuaries. No cost, and no sales call.