A growing number of US life and annuity insurers are ceding business to sidecars. The use of these structures has tripled since 2021, with about a dozen companies utilizing them by the end of 2023.
Sidecars – traditionally associated with property and casualty insurers – are being adopted in the life and annuity segment as companies seek alternative ways to manage capital amid rising premium volumes.
Ceded reserves to sidecars have increased threefold over the two-year period, according to a report from AM Best.
Jason Hopper (pictured above), associate director at AM Best, said the shift is primarily tied to capital management in response to industry growth.
He noted that rising interest rates have contributed to higher annuity and premium inflows, prompting insurers to look for new ways to manage capital requirements. Some have responded by establishing their own sidecars and ceding a portion of their annuity business to these entities.
In its report, AM Best notes that the individual annuity sector has seen a 66% rise in reinsurance leverage over the past five years. The demand for first-year premium surplus relief has also reached its highest point in a decade as insurers seek to balance new premium growth.
The largest contributors to the rise in ceded reserves include Martello Re (MassMutual), Ivy Re II (Global Atlantic/KKR), and Prismic Life Re (Prudential/Warburg Pincus), which collectively account for nearly 75% of the total amount.
Hopper said the trend has been more prominent among annuity-focused companies, particularly those backed by private equity or asset managers.
He also pointed to the increasing use of fund withheld coinsurance, where the ceding company retains the underlying assets and continues to manage them. That structure aligns with the business model of investment-oriented insurers that seek to generate higher yields from retained assets.
The growth of sidecar use is expected to continue in the near term. Hopper said annuity growth has not slowed and noted that several transactions announced in 2024 are not yet reflected in AM Best's data. He said current trends indicate continued momentum as long as the annuity market expands.
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