Best’s Special Report: More Upgrades, Fewer Downgrades for U.S. Life/Health Insurers in First Half of 2026

AM Best reported that U.S. life/annuity and health insurers recorded twice as many rating upgrades as downgrades in the first half of 2026 versus the prior-year period. The improvement reflects strong recent growth among life insurers, particularly from robust annuity sales, and signals a strengthening credit profile for the sector.

Analysis

The rating trend is more consequential for spread-dependent insurers than for the sector broadly: lower perceived credit risk can reduce marginal funding costs and release capital flexibility, reinforcing the annuity-sales flywheel. Public carriers with large fixed annuity and registered index-linked annuity platforms—ATH, JXN, LNC, PRU and MET—should see the greatest valuation sensitivity if upgrades translate into improved distributor confidence and lower reinsurance/collateral costs. The near-term earnings benefit is modest; the more material 6-18 month effect is incremental sales capacity and a lower required return multiple applied to long-duration earnings.

The overlooked risk is that stronger ratings may reflect a favorable point in the credit cycle rather than permanently improved liability economics. Insurers have expanded asset allocations into private credit, structured credit and asset-backed finance to support credited rates; a widening in BBB/private-credit spreads or rising impairments would pressure statutory capital well before GAAP earnings visibly deteriorate. This makes the rating momentum selectively positive for balance-sheet-heavy annuity writers but not a blanket sector signal.

Over the next 1-3 months, monitor quarterly statutory filings, risk-based-capital ratios, fixed-income impairments and management commentary on annuity crediting rates versus new-money yields. A sustained fall in Treasury yields would also complicate the thesis: it boosts existing bond marks but compresses reinvestment yields and can intensify competition for annuity flows. The thesis is falsified by rising credit losses, material reserve strengthening, or guidance indicating spread compression despite sales growth.

Key Decisions for Investors

• Watchlist long ATH versus short KIE over 3-6 months: ATH offers more direct sensitivity to annuity asset growth and funding-cost improvement than the diversified insurance ETF. Initiate only after confirming stable quarterly adjusted operating ROE and no deterioration in credit-loss disclosures; exit on a meaningful RBC-capital decline or negative ratings outlook.
• Prefer JXN over LNC for selective annuity exposure over 6-12 months: JXN has higher earnings torque to stable equity markets and annuity demand, while LNC retains greater legacy reserve and capital-management uncertainty. Size as a relative-value position rather than outright duration exposure; principal risk is an equity drawdown or credit-spread shock that raises hedging and capital costs.
• Do not chase a broad life-insurer rally immediately. Set an alert around 3Q/4Q statutory disclosures for increases in below-investment-grade/private-asset exposure, impairments, or crediting-rate competition; evidence of those trends would support reducing ATH/JXN exposure and favoring more diversified MET/PRU.
• For a defensive expression if credit spreads widen, pair long MET or PRU against short JXN: diversified fee, protection and international businesses should be less exposed to a reversal in annuity-spread economics. Reassess if long-end Treasury yields rise materially while credit spreads remain contained, which would restore the higher-beta annuity writers' reinvestment advantage.