Although higher interest rates and more favourable mortality trends have led to improved conditions for life/annuity (L/A) reinsurance companies, they have also created more competition, with some backed by alternative investment managers or large private equity firms, according to a new AM Best report.
The Best’s Market Segment Report, “Life/Annuity Reinsurers Face Growing Competition as Conditions Improve,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.
The report states that 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 co-insure assets that can be rolled into high-yielding positions, mainly in public, private, or alternative fixed-income products. 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-capitalised 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.
“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,” said Mr Ed Kohlberg, director, AM Best.
Historically, the US life reinsurance market had been pressured as primary insurers transferred less risk to third-party reinsurers, which led to a long decline in cession rates. More recently, rising interest rates led to robust annuity sales, which has motivated some primary carriers to reinsure incremental business.
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. 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 Mr Stratos Laskarides, senior financial analyst, AM Best.