According to Fitch Ratings, over the past 12 months ending August 2026, there were 109 defaults by 89 entities, compared to the same period ending July 2026, when 83 entities saw 105 defaults. With businesses (especially life insurers) exposed to asset management risks, it’s important to understand how to find financial balance.

Defining Asset Valuation Reserve (AVR)

An AVR is a repository for life insurance companies to offset a drop in markets and/or asset portfolios that are meant to fulfill contractual obligations for claims, annuities, and related insurance obligations.

According to the American Council of Life Insurers and the National Association of Insurance Commissioners (NAIC), the AVR factors in every realized investment profit and loss after factoring in net deferred taxes for credit and equity investments. Companies are required to fund the AVR initially and adjust it annually to manage ongoing and future obligations.

As part of the agreement that insurance companies have to pay out an insurance claim in exchange for receiving premiums, an insurance company has to ensure they are financially solvent to keep paying out claims. The same requirement also pertains to annuities that an insurance company contracts with customers, including making periodic payments. Through the valuation reserve requirements, insurance companies can measure their reserves and investments to increase the chance they’ll be able to meet their financial obligations regularly.   

Depending on the interest rate environment, insurance companies can experience threats to their allocated reserves to continue annuity payments over time compared to life benefits paid out all at once. Based on the American Council of Life Insurers, the percentage in reserves for annuities increased to 23 percent in 1990, up from 8 percent in 1980, showing how insurers must keep up with client demands and manage risk.    

How it’s Constructed

An AVR creates an organized set of entries for the assets and liabilities. Insurance companies are also able to compare assets and liabilities against actuarial valuation standards to plan for projected unknown, unsettled asset shortfalls. It also helps companies monitor the appropriate detection of long-term anticipated stock investment proceeds. For publicly traded insurance companies, it provides greater transparency for equity and bond holders, along with regulators.

The default component accounts for four-fifths of the AVR. Insurance companies implement investment vehicles such as mortgages and fixed-income options to manage their credit risk. As the name implies, the equity piece of the AVR balances the reserve with preferred and common equities or stocks, along with real estate investments. This mix is required for insurance companies because it creates a buffer from gains realized from positive market years, which offset insurance company obligations during periods of negative market performance.

Building the AVR is unique to each company’s financial makeup and needs to be dynamic, but must follow industry standards. While insurers or any market participant cannot predict the market with 100 percent accuracy, insurers with a properly constructed and reported AVR can more easily navigate an economy that becomes turbulent and uncertain.

Sources

https://www.fitchratings.com/research/corporate-finance/fitch-ratings-us-private-credit-default-rate-rose-to-6-3-in-august-2026-14-09-2026

https://www.acli.com/-/media/ACLI/Files/Fact-BooksPublic/2019FLifeInsurersFactBook.ashx?la=en

https://content.naic.org/sites/default/files/call_materials/4%20-%20AVR%20IMR%20Final%20Rept%20to%20NAIC%20%20Dec%202002.pdf

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