Principal seeking options for $7B guaranteed universal life block among others

Carrier retreats from the market for universal life insurance products with secondary guarantees could create supply-side opportunities for reinsurers and other capital solutions providers.

Principal Financial Group Inc., which announced the discontinuation of new sales of the interest-rate-sensitive product in January, revealed in a June 28 announcement that it would pursue strategic alternatives for both the associated block of in-force business. The company also initiated a review of alternatives for blocks of fixed deferred annuities and single-premium income annuities as it exits the retail fixed annuity market as part of a broader effort to create a more capital-efficient business model.

The annuities blocks and universal life with secondary guarantees blocks had totals of $18 billion and $7 billion, respectively, of associated GAAP reserves, Principal said.

"There's quite a range of different options," said Principal Chairman, President and CEO Daniel Houston during the company's June 29 investor day regarding the alternatives under consideration.

Alternatives for legacy blocks of fixed annuities have been clearly articulated with an increasing number of writers turning to reinsurance and, in particular, treaties structured as modified coinsurance with funds withheld. Jackson National Life Insurance Company and American Equity Investment Life Holding Co. represented two prominent examples of leading annuity companies that announced such an approach for portions of their portfolios in 2020.

There is also a well-defined and ever-expanding range of insurers and reinsurers actively seeking in-force fixed annuity blocks, headlined by Athene Holding Ltd. Like Athene, with its deep ties to Apollo Global Management Inc., alternative asset managers such as The Blackstone Group Inc., Ares Management Corp., The Carlyle Group Inc., KKR & Co. Inc. and Brookfield Asset Management Inc.'s newly launched Brookfield Asset Management Reinsurance Partners Ltd. maintain strategies to unite spread-based insurance liabilities with differentiated asset management strategies. Various other reinsurers, including Reinsurance Group of America, Incorporated and Wilton Re Ltd., are active in the market. And so, too, are newer entrants such as Kuvare Holdings LLC through Lincoln Benefit Life Company Inc.

Companies such as Principal and, in July 2020, Prudential Financial Inc., pulled back from sales of universal life with secondary guarantees in a challenging interest rate environment. But there have been fewer examples of primary carriers reinsuring blocks of that business to unaffiliated reinsurers.

U.S. life insurers that file annual statements with the National Association of Insurance Commissioners reported aggregate net reserves for individual universal life policies with secondary guarantees of $144.91 billion as of Dec. 31, 2020, after accounting for reinsurance, including $3.53 billion for the Principal group.

Data reported on the statutory Supplemental Term and Universal Life Insurance Reinsurance Exhibit of 2020 annual statements showed that U.S. life insurers recorded a reserve credit of $121.47 billion on universal life policies with secondary guarantees reinsured by affiliated entities that do not file annual statements with the NAIC, such as on- and offshore captives. Principal Life Insurance Co. accounted for $5.35 billion of that amount through cessions to Principal Reinsurance Co. of Vermont, Principal Reinsurance Co. of Delaware and Principal Reinsurance Company of Delaware II. Principal previously disclosed that it formed the Vermont captive in November 2006 to reinsure a portion of its "universal life 'secondary' or 'no-lapse' guarantee provisions" in an arrangement that resulted in a reduction of its statutory capital requirements.

There was an additional reserve credit of $44.11 billion in the aggregate taken by U.S. life insurers on universal life policies with secondary guarantees through reinsurance relationships with currently unaffiliated counterparties. More than one-quarter of that amount pertains to relationships that stem from Prudential's 2013 acquisition through reinsurance of the former individual life business of The Hartford Financial Services Group Inc. Another $6.38 billion of the total stems from American International Group Inc.'s cession to Hannover Life Reassurance Co. of America of guaranteed universal life reserves on a coinsurance basis as part of a broader life reinsurance arrangement that took effect in 2016. Hannover Re maintains another universal life relationship effective in 2013 with Genworth Financial Inc.'s Genworth Life & Annuity Insurance Co. for which the cedant reported an associated reserve credit, including on coinsurance and modified coinsurance bases, of $2.24 billion on its 2020 supplemental exhibit.

More recently, but of a lesser magnitude, two Sammons Enterprises Inc. companies combined to take reserve credits in 2020 of a combined $1.55 billion connected to the reinsurance of universal life policies with secondary guarantees by the New Reinsurance Co Ltd. subsidiary of Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München.

For Prudential, after announcing the suspension of sales of its single-life guaranteed universal life product, the company indicated in September 2020 that options for optimizing the economics of the associated block included run-off, reinsurance, or a potential sale.