The higher interest rate environment of the past few years has had the impact of supporting activity in asset intensive life reinsurance transactions, in which the buyer onboards both the liabilities, which carry biometric/longevity risk, and the assets backing them.
These deals – not to be confused with the primary pension risk transfer market, which, while an asset-intensive transaction, is not a reinsurance one – have been, and still are, something of a ‘win-win’, as the life insurer gets what it wants: the ability to offload certain blocks of either life insurance policies or annuities for balance sheet management purposes, and so does the buyer, as higher interest rates provide a wider spread over the liabilities, which are largely fixed when the transaction is completed.
The bulk of the activity in this market relates to legacy-strained blocks of business, for two reasons.
“First, the originating insurance companies often seek to de-risk from certain policies that have not performed well due to a misalignment of original pricing assumptions versus actual experience,” said Prannoy Chaudhury, Principal and Consulting Actuary at Milliman.
“Second, these legacy blocks, such as universal life policies or high guarantee deferred annuities, are asset-intensive and attract interest from various asset managers,” he added.
The US is the market that delivers the bulk of activity in the space. Part of the reason is that the regulatory framework for life insurance in the US is, while robust, is arguably less onerous than that of Solvency II in the EU, or the newly-finalised Solvency UK regime.
But another reason is because annuities are much more common stateside than in Europe, for example. In mid-February last year, the Association of British Insurers published data suggesting that annuity sales in the UK in 2023 totalled £5.2bn.
In contrast, US industry group the Life Insurance Marketing and Research Association (LIMRA) published data at the end of January last year that showed total annuity sales in the USA of $385bn in 2023.
That does not mean that, like the life settlement market, for example, this is a US-only industry.
“The future growth of this market is difficult to speculate on, however, it is worth noting that trends in legacy strained blocks of business are not limited to the US,” said Chaudhury.
“There is growing interest in other parts of the world, such as Europe and Asia, with notable activity in markets like Germany and Japan, indicating a potential for broader market expansion beyond its current niche.”
Indeed, Japan has delivered some activity in this market, with two transactions in 2024 involving Reinsurance Group of America entering into a deal with Japan Post Insurance Company to reinsure a Y700bn block of in-force annuities in March and Pacific Life Re and Anshin Life partnering on a deal covering in-force, whole of life policies in May.
Asset-intensive life reinsurance deals are large, complex, and the process from idea generation to deal completion is lengthy. Therefore, activity in the space is accounted for by larger firms that have both the people resources and, in the case of traditional reinsurers, balance sheet size, and in the case of asset manager-backed reinsurers – many of which got their start in private equity before evolving into multi-asset class firms – access to large, sophisticated investors to support these transactions.
However, that does not mean that future activity in the market will be limited to these mega-deals. Indeed, the asset-intensive life reinsurance space might see the emergence of a lower to middle market in the coming years.
“It is hard to say how much annuity or life insurance business insurers will exit, but I see these deals happening on smaller scales with smaller life/annuity companies in the next three years,” said Brian T. Casey, Partner at law firm Troutman Pepper Locke.
Until then, the upper end of the market – which is currently the only end of the market – will continue to deliver almost all of the activity in this market. And, despite the recent cuts to the US federal funds rate – which, other things being equal, impact demand for asset-intensive life reinsurance transactions because the spread between asset and liability performance narrows somewhat – the coming years should deliver a similar, if not slightly higher, level of activity generally.
“It is not clear where the interest rate environment will settle, but the baseline interest rate environment is higher than what we saw for around the decade prior to 2022,” said Chaudhury.
“That should alleviate some of the existing interest rate spread compression in previously issued blocks of business, as well as continue to keep insurance savings products attractive to new customers.”