According to ratings agency AM Best, reinsurance leverage and surplus relief has risen significantly in recent years, driven by strong annuity premium growth, which has driven additional capital to the market, while a number of life and annuity (L/A) insurers have established sidecars to manage expansion and risk-based capitalisation.
In fact, the agency states that total ceded reserves to sidecars increased to nearly $55 billion in 2023, tripling from around $17 billion in 2021.
In a new report, AM Best highlights that individual annuities have seen substantial growth amid rising interest rates. Given the capital-intensive nature of the annuity business, this expansion has fueled demand for additional capital in the reinsurance market to support capacity as insurers work to balance growth and maintain adequate capitalisation.
As a result, the individual annuity sector has experienced a steady increase in reinsurance leverage, measured by ceded reserves relative to capital and surplus, over the past four years.
However, one key strategy that has become more prevalent throughout the last few years, is the formation of sidecars.
According to AM Best, around a dozen US L/A companies ceded business to sidecars at year end 2023, however, that number has tripled since 2021, and a handful were also formed in 2024.
“Martello Re (Mass Mutual), Ivy Re II (Global Atlantic/KKR), and Prismic Life Re (Prudential/Warbug Pincus) combine for nearly three quarters of the ceded reserves. The vast majority of reserves ceded are covering liabilities for indexed and fixed annuities. We expect this trend to grow much more significantly as more deals closed in 2024 and the environment continues to be conducive for annuity growth,” commented AM Best.
Adding: “Some L/A companies have started with a first and/or second block deal ceded to the sidecar, providing capital relief to the insurer, and to get the sidecar some scale and provide diversification, and then look to expand and reinsure diversifying business or third party business (either flow or legacy blocks). For example, Prudential Financial recently announced it would reinsure $7 billion in reserves backing Japanese whole life policies with Prismic Life Re, diversifying the sidecar’s risk and earnings profile.”
Interestingly, AM Best also highlights how the proliferation of sidecars has allowed private capital another avenue to enter the L/A segment.
“Even if asset manager sponsors maintain their commitment to the long-term nature of life and annuity insurance business through partial or outright ownership of some companies, the sidecars to which they reinsure a small share of the business may follow a traditional private equity model, in which the limited partners commit to a three- to seven-year investment horizon,” the agency explained.
However, analysts note that seperate owners and board of the sidecar would enable it to provide reserve and risk-based capital relief to the asset manager, but this also means that the sidecar may pivot the business mix to different types under a separate strategy or risk appetite and underwriting frameworks, which could wind up introducing additional risk.
“Conversations with management teams reveal a long-term commitment and focus, with an understanding of what the products require,” AM Best concludes.
As a reminder, you can read all about the many reinsurance sidecar investments and transactions over the history of the ILS market, by visiting our comprehensive list of collateralized reinsurance sidecars transactions.
