Life reinsurers: a new class
Bermuda is playing host to a burgeoning life reinsurance sector that has found a welcome home on the Island. We talk with leading members from the market about their motivations behind their domicile decision, market demand and life players’ growing voice in Hamilton.
Life reinsurers are becoming an increasingly important part of the Bermuda market. Talking with David Cash, vice chairman of the Bermuda Business Development Agency at the end of 2013, he said that life reinsurers are establishing themselves as a new class on Island, there to benefit from a supportive capital and solvency framework. Today, the long-term and life reinsurance industry represents around a third of the Bermuda market in terms of gross written premiums and total assets and that amount looks set to increase still further.
Indicative of this support has been the emergence of what, John Coughlin, CEO of Safe Harbor Re, calls the “second wave of life and annuity reinsurers in Bermuda”—of which Safe Harbor Re is a part—which is following in the footsteps of life and annuity success stories Athene Life Re, Guggenheim Life and Annuity and Global Atlantic. Coughlin said that Bermuda has continued to attract interest as a recognised “centre of innovation, which delivers measurable regulatory and operational flexibility to an industry with a lot of moving parts”.
Caspar Young, managing director of Aurigen—another second wave entrant—commended Bermuda on its structuring environment. “When we structured our company we wanted Bermuda to be the hub of our risk collection from all geographies—it is the spoke of the wheel where we accumulate risk”. Risk accumulation and scale then help to build consistency of performance, he explained, with Bermuda playing host to growing and increasingly diverse global operations.
Further cementing Bermuda’s position is its “long established and proven track record as a premier jurisdiction for insurance and reinsurance companies”, said Rodney Cordle, managing director of Standard Life, Bermuda. As he outlined, with first class communication, ease of access to North America, a sophisticated business climate and a stable and straight-forward legal, political and regulatory environment, Bermuda was the natural fit for the company’s reinsurance operations.
Chip Gillis, CEO of Athene Life Re—one of the first wave of entrants into the Bermuda market—concurs, describing the Bermuda market as benefiting from a “sound regulatory regime that is well-respected globally”. He added that as a recognised global centre for reinsurance, the Island was the obvious choice for the domicile of Athene Life Re.
Bermuda’s regulatory advantage has been strengthened still further by its recent classification as a conditional qualified jurisdiction by the NAIC, said Cordle. “As a result, reinsurers domiciled in Bermuda will be eligible for certification for reduced reinsurance collateral requirements.” The development is another feather in the Island’s already well-dressed cap, which will likely encourage still further life and annuity players to Bermuda’s shores.
Not that a wave of new entrants will simply materialise. As Coughlin explained, while he anticipates a few new entrants, “the number of teams that can source and execute these types of transactions is limited. A significant part of the business is about sourcing the liabilities, and cedants want to see experienced re/insurance professionals as their partners, especially for longer duration liabilities.” Doing so will require the expertise and contacts currently enjoyed by the Island’s incumbent players.
The beauty of diversity
Despite the headline notion that life and annuity players are a homogenous group, it is apparent from talking with all four players that their operations differ considerably. Athene Life Re, one of the first wave of entrants into the Bermuda market, has sought to “replicate” the successful Sun America explained Gillis, with an unswerving focus on the US retirement sector. 80 percent of Athene Life Re’s business is reinsurance, although the company has been an active acquirer, purchasing four US insurance companies to complement its offering. The company is able to access business from multiple sources, Gillis explained, from reinsurance clients through to its sister insurance companies, which cede 80 percent of their reinsurance business to Athene Life Re.
Aurigen on the other hand is a pure life reinsurer with an operational focus on North America. As Young explained, the reinsurer specialises in mortality and biometric risks as opposed to fixed annuity risks, meaning that the company is not in the asset intensive space. Typical cedants are medium and large retail insurers who want to reinsure their mortality risk, explained Young.
Standard Life, for its part, began by offering affiliate reinsurance to the Standard Life Group, but has since expanded its offering to include mortality-based reinsurance solutions to third party companies, explained Cordle. “With no legacy life reinsurance business, Standard Life offers its clients fresh capacity and allows for risk diversification with the dependability of a solid financial partner with over $2 billion of capital”
Safe Harbor Re has perhaps the most unique business model, bringing to bear an open architecture platform and custom-designed programmes that matches appropriate capital to client’s specific liabilities, said Coughlin. The approach is fee-based, with the intention being to offer a range of best in class asset management strategies, he explained. “Such an approach means we are agnostic when it comes to investment strategies, and are not assets under management-driven, which allows us the flexibility to tailor custom solutions for our clients, and in many cases incorporate their significant investment capabilities in the management of the programme. Instead our focus is on bespoke transactions”, where Safe Harbor Re applies a sole-purpose corporate architecture that enables clients to benefit from a dedicated investment strategy and 100 percent of its corresponding yield. The client focus in on US and UK insurers, with relationships transacted direct with clients.
A voice at the table
Despite the differences between the approaches being taken by market participants, they have established for themselves a strong voice in BILTIR—the Bermuda International Long Term Insurers and Reinsurers. As Young—one of the directors of the association—explained, BILTIR was created in response to suggestions from the Bermuda Monetary Authority (BMA) that the life sector and the BMA would benefit from a collective voice that represents the interests of the market. The association has since grown from an initial four members to 40 today and continues to grow its role and voice in the market.
Cordle said that the BMA has been “very receptive to BILTIR’s feedback regarding Bermuda’s solvency modernisation efforts and the effects that it may have on life and annuity re/insurance in Bermuda”. He said that BILTIR has taken a lead informing the BMA about the impact that regulatory changes will have on companies assuming long-duration insurance obligations “while recognising the necessary evolution of the regulatory framework in order to maintain its highly regarded standards in a more globalised world.” As Young explained, life players have a far longer liability horizon than their peers in property cat and as such the “regulatory framework needs to recognise that longer term view of risk”.
In response to Bermuda’s growing life sector, the BMA added staff, with numbers now commensurate with risk and market size. There is every expectation that BILTIR and the BMA will continue to enjoy what Coughlin calls a “healthy and robust relationship”.
BILTIR will have to oversee a market that is growing rapidly, but one that faces a challenging low interest rate environment. Its success is evident in the development of many of the first wave into primary players, said Coughlin, with Island players making forays and a number of acquisitions in the US life insurance market. “A number have evolved into primary distribution platforms onshore in the US, using reinsurance as a means to bring appropriate leverage to bear on their annuity products”, he explained.
Athene Life Re is one such player, with the company having acquired four US insurance companies in recent years. Gillis said that its acquisitions had been largely opportunistic, with the withdrawal of a number of European and Canadian life players from the US life and annuity market following the financial crisis creating an opportunity for entry. The acquisitions have helped Athene Life Re create considerable synergies with its sister companies. As he explained, “US life insurers are sensitive to the risks they are taking on, so are willing to share that risk and improve their returns.” This is where reinsurers such as Athene Life Re come in, responding to the growing use of reinsurance by US life companies.
At the same time, the wider life and annuity sector is benefitting from population dynamics that are seeing people living longer and having to plan for a lengthy retirement. This is presenting considerable opportunities for the sector. As Coughlin explained, in the US the baby boomer generation is retiring, bringing 80 million people into the retirement market over the next 10 years—“and those annuities need capital support”. Sales of life and annuity products are rising at or above inflation, said Young, with demand likely to continue to rise. He said that in the UK, for example, there is “growing pressure to offload longevity risk”, with much of that coverage making its way to Bermuda.
Not that there aren’t headwinds facing the sector. Cordle explained that the “traditional life reinsurance business ceded from US writers has been declining as direct companies have increased their retention levels and have found innovative ways to self-fund redundant statutory reserves requirements.” This has created challenges for life reinsurers, he said, but consolidation within the space will likely encourage primary players to reconsider their aggregate counterparty exposures. “As enterprise risk management frameworks within the industry grow and become more detailed it’s likely that this concentration of business across a handful of reinsurers will motivate direct writers to diversify, resulting in greater consideration for highly rated newer entrants such as Standard Life.”
Coughlin added that “the low interest rate environment is having a significant impact on life portfolios”, which is proving a mixed blessing. For life reinsurers “most products are at their guaranteed minimum floor crediting rate,” explained Coughlin. Tapering, and its impact on interest rates, is being eagerly watched by the industry in the hope that it will bring some relief. But while the interest rate environment is forcing life and annuity reinsurers to manage their own portfolios through a troubled investment environment, it is also encouraging primary players to seek out viable asset-based solutions in the reinsurance space, he said.
Young was circumspect about the impact of the low interest rate environment. “The investment environment is always challenging; I don’t care what time you pick. The real question is can you price short term fluctuations into your pricing”. With a conservative investment strategy that enables Aurigen to be agnostic as regards where the market goes, Young said he was not unduly worried about conditions.
The final key dynamic is active M&A within the market—both on the primary and reinsurance side of the sector. Coughlin predicts a wave of M&A to come, with a number of combined players looking to sell off their life divisions in order to concentrate on core business. Young likewise said he anticipates further M&A as well as the emergence of new players. “There is a case for new entrants because so many reinsurers have left the US market and as such there may be a dearth of counterparties.” Athene Life Re’s acquisitions in the US primary market provide some indication of a possible heading. Following its recent—and extremely successful—capital raise, the company may be in a position to further enlarge its US life and annuity footprint. Others in the Bermuda market are likely to follow its lead.
Reasons to be bullish
Despite tough conditions, it is apparent from talking to all four life and annuity players that they are bullish about the future of the sector. “There are increasing synergies between primary players, reinsurers and distribution,” explained Coughlin. “This is supported by the demographics of the annuity buyer, the development of innovative products and rising demand for retirement solutions.” Gillis spoke about Athene Life Re’s ambitions to do exactly that, aligning distributors with their insurance and reinsurance companies through Bermuda-based solutions, which will in turn drive returns and distributor buy-in.
Young said that the number of new long-term insurers and SPIs that are coming to the Island and setting up operations has given him cause to be optimistic about the future of the sector and Bermuda’s role in its development. Cordle spoke in a similar vein, arguing that Bermuda has done particularly well in the US fixed annuity space. He said that the low interest rate environment has helped strengthen demand for asset-inclusive reinsurance solutions among US annuity insurers; while Bermuda’s capital and solvency modernisation efforts have further enhanced its position, creating a globally recognised and well-received framework. Bermuda’s life sector is on a roll.