Higher interest rates are encouraging life insurance companies to acquire assets, marking a shift from years of low rates that pushed listed insurers to divest assets, often to private equity investors, according to new insights from Swiss Re.
The current environment supports strong, profitable balance sheet growth, it was suggested, with Swiss Re forecasting a 40% increase in industry investment income in key markets by 2027. Competition remains intense, with asset management capabilities developed during the low yield years serving as a key differentiator and fostering product innovation beyond traditional life offerings.
Swiss Re expects a 40% rise in insurers’ investment income in the eight largest life markets over the next five years. The competition for assets between listed and private equity-owned insurers is intensifying as their business models converge.
Asset management capability will be the primary differentiator in the race to acquire new assets, followed by attractive and competitive product offerings.
The current “higher for longer” interest rate environment is boosting life insurance demand, new business sales, investment performance, and profitability. Swiss Re forecasts a 40% increase in investment income, driven by higher bond yields, for insurers in the largest eight life markets by 2027.
The competition between insurance companies to acquire and grow their assets, either through new business sales or acquiring blocks of assets from sectors such as pensions, is intense. Swiss Re noted that investment capabilities and core offerings will likely determine who gets ahead; if competition remains rational, consumers should benefit from more attractive crediting rates and diverse new offerings.
Life insurers are returning to asset-intensive business after struggling to generate positive returns during low the interest rate years. Swiss Re explained that the return margins on traditional life insurance products with fixed guarantees are more sensitive to interest rates, and insurers can benefit from holding more of these assets now that rates are higher.
Under low interest rates, listed insurers faced unfavorable public market valuations for traditional business, with lower multiples awarded to spread-based income rather than on fee-based income, such as from “capital light” products like unit-linked offerings.
As a result, listed insurers pivoted to capital-light business and divested legacy books of traditional assets, often to private equity firms. Swiss Re estimates that private equity-owned insurers now hold roughly 25% of US individual annuity liabilities.
Insurance companies are tapping a new supply of portfolio-level deals and bulk annuities from corporates and pension funds seeking to de-risk liabilities. In the UK, improved funding levels in defined benefit pension schemes have led to record new buyouts by the life industry, totaling £49 billion in 2023, a 73% year-over-year increase, according to Association of British Insurers data.
Swiss Re highlighted that de-risking volumes are expected to peak in 2026–27, but increased regulatory scrutiny on funded reinsurance arrangements may slow activity growth in 2024/25. In the Netherlands, pension reform in 2023 has opened a €1.5 trillion risk transfer market.
Stock and private equity-owned life insurers’ business models are converging. Private equity-owned insurers are expanding direct retail sales, especially of fixed annuities, to compete with traditional stock insurers. In 2023, they issued $58 billion of US individual annuities, or roughly 18% of the total $320 billion industry issuance, a two-fold increase since 2019.
In Europe, where regulators are more skeptical of private equity, their entry into the life sector has been slower. Swiss Re noted that traditional life insurers are finding alternative ways to retain business to avoid divesting assets, such as by using more captive insurers and raising institutional capital in affiliated special purpose vehicles called “sidecars”, which transfer a portion of risk to third-party investors.
Asset management capabilities will be the first differentiator in the race for assets. The “hunt for yield” in the low-rate years led to deeper integration of life insurance and asset management.
Large insurers built sophisticated asset management divisions, including expertise in private asset origination, and expanded their investment-linked product offerings in which policyholders bear more of the investment risk. Mobilizing this asset management capacity for re-risking products and innovation will be key for success in gaining assets.
Attractive and competitive product offerings will be a second differentiator. In the US, higher rates supported a rotation from variable to fixed savings products in the past two years. The next phase, if rates stay elevated, is likely to be the re-risking of products, but insurers are being patient and cautious. In Europe, a complete pivot back to traditional business appears unlikely.
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