Competition increasing in life/annuity reinsurance
Higher interest rates and more favourable mortality trends have led to improved conditions for life/annuity reinsurance companies, according to a new report from AM Best.
But it has also created more competition, with some new entrants backed by alternative investment managers or large private equity firms, according to the new AM Best report.
There has also been an increase in the amount of reinsurance ceded offshore, the report said. Bermuda is the leading offshore domicile for life/annuity reinsurance companies.
The report, “Life/Annuity Reinsurers Face Growing Competition as Conditions Improve”, said new capital continues to flow into the segment, primarily via reinsurers owned by investment managers focused on annuity business.
"These newer entrants have sought to coinsure assets that can be rolled into high-yielding positions, mainly in public, private or alternative fixed income products," AM Best said. "These reinsurers also can offer attractive ceding commissions based on higher anticipated investment returns once the transferred assets are rolled into a wider set of investment opportunities.
"Overall, L/A reinsurers are well-capitalized and their risk-adjusted capitalisation is expected to remain healthy through 2025, despite risks that remain in investment portfolios and elevated mortality for some. Reinsurers owned by asset managers are more comfortable taking on investment risks utilizing investment experience from their parent companies in structured products, mortgages, private credit or other alternatives."
Ed Kohlberg, director, AM Best, said: "How newer entrants will alter their strategies over the long term depending on macroeconomic trends, availability of deals and regulatory changes remains to be seen, but by all indications, this ‘new capital’ is here to stay, with billions more committed but on the sidelines waiting for the next opportunity."
The report said that rising interest rates had led to robust annuity sales which had reversed a trend of primary insurers transferring less risk to third-party reinsurers which had driven cession rates down.
"While annuities are a very capital-intensive product, asset managers have thus far supported rapid growth by providing the needed capital and not constraining growth with material dividends," AM Best said.
"Bermuda, and to a lesser extent, the Cayman Islands, have gained popularity based on the stable economic environment and regulatory landscape, as well as political stability and access to legal and financial talent. They also have flexible accounting regimes and can choose which accounting system works best."
“The notable annuity growth is likely to continue, and more companies may look to reinsurers to manage growth and capital levels. With new company formations, partnerships and private capital entering the market, the reinsurance market remains competitive with a larger share of business ceded to affiliates and third-party reinsurers,” said Stratos Laskarides, senior financial analyst, AM Best.
The report said that $1.3 trillion in annuities were ceded in 2023, up from $1.03 trillion in 2022, while life insurance policies ceded increased to $948 billion from $884 billion in the same period.
However, the level or reserves ceded offshore now accounts for about 45% of the market and has steadily increased annually.
"Newer entrants backed by private/equity asset managers typically focus on annuity business and seek to coinsure assets that can be rolled into high-yielding positions, mainly in public, private or alternative fixed-income products.
"These reinsurers offer attractive ceding commissions based on higher anticipated investment returns once the transferred assets are rolled into a wider set of investment opportunities.
"AM Best will continue to watch this growing trend and assess each transaction on its merits. Concerns occur when a more aggressive asset strategy is taken by these offshore entities and if capitalization and access to capital for growth for these companies diminish."
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