Higher interest rates and improved mortality trends have created more favorable conditions for life and annuity (L/A) reinsurance companies, but they have also intensified competition, particularly from entities backed by alternative investment managers and large private equity firms, according to a recent report from AM Best.
According to the report, new capital continues to flow into the L/A reinsurance segment, particularly through reinsurers owned by investment managers focusing on the annuity business.
These newer market participants are looking to co-insure assets that can be allocated to high-yielding investments, such as public, private, or alternative fixed income products. They also offer attractive ceding commissions, driven by higher anticipated investment returns from diversified investment opportunities.
The report highlights that L/A reinsurers are well-capitalized, with their risk-adjusted capitalization expected to remain robust through 2025, despite ongoing risks in their investment portfolios and elevated mortality in certain areas.
Reinsurers owned by asset managers are more inclined to take on investment risks, leveraging the investment expertise of their parent companies in areas like structured products, mortgages, and private credit.
Ed Kohlberg, director at AM Best, commented on the long-term impact of these new entrants, noting that their strategies may evolve based on macroeconomic trends, deal availability, and regulatory changes. However, he emphasized that this new capital is likely to remain in the market, with significant additional funds waiting for future opportunities.
The US life reinsurance market has historically faced pressure as primary insurers transferred less risk to third-party reinsurers, leading to a decline in cession rates. However, the recent rise in interest rates has spurred annuity sales, prompting some primary carriers to reinsure more business.
Asset managers have supported this growth by providing the necessary capital without imposing significant dividend constraints. Bermuda and the Cayman Islands have become popular domiciles for these reinsurers due to their stable economic and regulatory environments, political stability, and access to legal and financial expertise.
Stratos Laskarides, senior financial analyst at AM Best, said that the notable growth in annuities is likely to continue, with more companies potentially turning to reinsurers to manage growth and capital levels.
The reinsurance market remains competitive, with a larger share of business being ceded to affiliates and third-party reinsurers, driven by new company formations, partnerships, and private capital entering the market.
Traditional life reinsurers also face challenges due to uncertainty about future mortality rates, particularly in light of the ongoing impact of COVID-19. According to the Centers for Disease Control and Prevention (CDC), as of summer 2024, COVID-19 has been attributed to over 1.2 million deaths in the US.
Although the impact on excess mortality is decreasing, it is not uniform across all demographics. A study by the Society of Actuaries projected that COVID-19 would continue to contribute to excess mortality through 2030, particularly for individuals aged 65 and older. Additionally, external factors such as drug overdoses and accidents have increased since 2019.
Despite these challenges, L/A reinsurers are expected to maintain healthy capitalization levels through 2025. While life reinsurers have traditionally avoided the investment risks associated with many primary life insurance products, the diversification strategies of primary insurers, including annuity and retirement business, add financial market risk.
The operating models of major global life reinsurers vary significantly, with some relying on their property/casualty business to balance earnings, which historically exposes them to less financial market risk than primary writers.
The report also underscores the importance of managing counterparty risk, particularly in light of recent high-profile insolvencies in the reinsurance space. Reinsurers are expected to conduct thorough due diligence, including strong counterparty and collateral reviews, to mitigate counterparty credit risk, especially as more reserves are ceded offshore.
The competitive landscape, bolstered by new entrants and private equity-backed reinsurers, is leading to the offering of attractive ceding commissions based on expected higher investment returns from diversified asset portfolios.
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