Large deals elevate private equity-linked reinsurers in US life, annuity market

Introduction

The role of reinsurance in the U.S. life and annuity sector continued to grow during 2021, and it is poised for further expansion in 2022 thanks in large measure to the growing role of entities linked to private equity firms.

Annual statement data shows that the ratio of ceded to gross life and annuity premiums and considerations, one measure of industry reliance on reinsurance, surged to 42.1% in 2021 from 35% in 2020 and more than double the result from a decade earlier. Within the ordinary individual annuity business, where much of the private equity-backed reinsurers' focus has centered, the ceded-to-gross ratio spiked to 48.5% in 2021 from 38% in 2020 and just 5.9% a decade earlier.

An analysis of individual life and annuity cessions shows a sharply heightened role of reinsurance in a way that is illustrative of private equity's growing influence. Cedant reserve credits taken for unaffiliated reinsurance grew by 16.2% in 2021 to more than $498 billion. An S&P Global Market Intelligence reconciliation and consolidation of individual reinsurance relationships as reported by cedants finds that private equity-backed reinsurers were associated with 27.4% of the reserve credits associated with unaffiliated relationships that remained current at year-end 2021, but they accounted for well over one-half for the relationships with effective dates in 2020 and 2021. Private equity-backed reinsurers separately play a significant role in modified coinsurance structures where the ceding entity does not take a reserve credit.

When considering private equity's role in several of 2022's largest transactions to date, this suggests their share of all current, unaffiliated relationships will likely rise and, in so doing, place an even brighter spotlight on their strategies at a time regulators and legislators have already begun to brainstorm potential new oversight.

Aiding an industry transition

The 2021 expansion reflects the ongoing confluence of a growing breadth and depth of reinsurer demand with an increasing supply of in-force liabilities from primary carriers.

Private equity-linked entities and other privately held reinsurance vehicles have made their mark through large block reinsurance deals, targeting liabilities such as fixed deferred, fixed indexed and variable annuities as well as universal life insurance with secondary guarantees from cedants looking to limit the size, scope and risk of their balance sheets. To a similar end, they have also increasingly engaged in M&A activity involving legacy variable annuity blocks and certain other liabilities. More recently, flow reinsurance transactions where the reinsurer takes on a portion of a cedant's new business writings on an ongoing basis have gained greater prominence. Examples of each of these structures are evident in the 2021 data.

Resolution Life Group Holdings LP figured prominently in the first of those structures through separate agreements with Allianz Life Insurance Co. of North America and Lincoln National Corp. In a deal structured as modified coinsurance, Resolution Re Ltd. is covering $26.39 billion of in-force fixed annuity reserves as part of a series of transactions that also includes private equity-backed Talcott Resolution Life Inc. Resolution's Security Life of Denver Insurance Co. assumed on a 100% coinsurance basis certain universal and variable universal life reserves from Lincoln National Life Insurance Co., for which the cedant reported a $4.99 billion reserve credit and $4.53 billion in modified coinsurance reserves. Security Life of Denver, itself, had been a Voya Financial Inc. subsidiary prior to the January 2021 completion of an M&A deal with Resolution involving the seller's individual life business.

A prominent transaction in 2021 that involved both block and flow reinsurance components was North End Re (Cayman) SPC's agreement with Brookfield Asset Management Reinsurance Partners Ltd., the reinsurance spinoff of Brookfield Asset Management Inc.

The largest individual relationship in effect at the end of 2021 based on the total reserve credit taken and regardless of the effective date involved private equity: Jackson National Life Insurance Co. reported a $24.5 billion reserve credit associated with a June 2020 fixed and indexed annuity transaction with Athene Life Re Ltd.

Alternative asset manager Apollo Global Management Inc. is deemed under state insurance laws to be the parent of both Athene Holding Ltd. and Venerable Holdings Inc. The latter entity assumed the legacy variable annuity business of Equitable Holdings Inc. in 2021 by acquiring Corporate Solutions Life Reinsurance Co. and assuming certain variable annuity contracts of Equitable Financial Life Insurance Co.

Venerable, The Carlyle Group Inc.'s Fortitude Group Holdings Parent LP, Sixth Street Partners LLC's Sutton Cayman Ltd. and the recently launched Martello Re Ltd., which is backed by an investor group that includes the likes of Centerbridge Partners LP, are associated with reinsurance and/or M&A deals with associated liabilities of nearly $72 billion that have taken effect to date in 2022 or are scheduled to do so later in the year. The deals include Fortitude's acquisition of Prudential Annuities Life Assurance Corp., Venerable's reinsurance of certain John Hancock Life Insurance Co. USA variable annuity business, Sutton Cayman's reinsurance of Principal Financial Group Inc. U.S. retail fixed annuity and universal life with secondary guarantees reserves, and Martello's reinsurance of Great American Life Insurance Co. fixed and indexed annuities.

In addition to these recent transactions, Athene, Talcott and Fortitude are reportedly vying for a prospective acquisition of Wilton Re Ltd., which Canada Pension Plan Investment Board has owned for the past eight years. Wilton Re accounted for an estimated $13 billion, or 2.6%, of the total cedant reserve credits associated with unaffiliated life and annuity reinsurance at year-end 2021, so a transaction of the sort would provide a different kind of inorganic boost to entities that have already added or are regularly seeking in-force blocks.

Key considerations

Senate Banking Committee Chairman Sherrod Brown, D-Ohio, in March tasked the Federal Insurance Office with preparing a report in consultation with the NAIC to address a number of his concerns associated with the growing number of insurance obligations being transferred to alternative asset managers. Brown alleged that those firms often pursue "much higher risk strategies than traditional insurance companies, and do not face all of the same capital, liquidity, and policyholder protection requirements as well-regulated insurance companies," which could potentially put retirement savings at risk under certain circumstances. The letter took note of an ongoing initiative by the NAIC to explore regulatory considerations applicable to private equity-owned insurers.

The NAIC's efforts include consideration of a new designation to distinguish a traditional stock insurance company from a financial-entity-owned insurer that may be more focused on generating fees than upstreaming dividends to a parent company or individual stockholders. As initially outlined in September 2021, a financial-entity-owned insurer is either controlled by or maintains a long-term investment management agreement with an entity that meets the following criteria: Derives the majority of its revenue through the management of, or investment in, financial assets; is not, itself, a regulated insurer; has at least a minimum amount of assets under management.

Under just about any conceivable definition, it would be easy to distinguish several private equity-linked insurers. There are the Apollo, Carlyle, Sixth Street and Brookfield entities along with KKR & Co. Inc.'s Global Atlantic Financial Group LLC. Several smaller alternative asset managers have also established vehicles to accumulate insurance liabilities. There are others still who control insurance companies but do not have a stated desire to amass additional liabilities. Blackstone Inc., for example, acquired Everlake Life Insurance Co. from The Allstate Corp. in 2021, but management has emphasized, including during an April 21 conference call, that they are not seeking to roll up large blocks of unaffiliated business.

The wide net seemingly cast by the NAIC concept, however, could result in financial-entity-owned insurer designations for the likes of the Fidelity & Guaranty Life Holdings Inc. subsidiaries of Fidelity National Financial Inc. based on their strategic investment agreements with Blackstone. Other consolidators, Resolution being the most noteworthy in light of its recent flurry of life and annuity block transactions, have emphasized that they do not operate under a private equity model. As such, we have included Fidelity & Guaranty companies in our analysis of private equity-linked insurers, but excluded Resolution.

Data regarding total reserve credits taken and modified coinsurance reserves reflects cedant disclosures on Schedule S, Part 3, Section 1 of 2021 annual statements. It is limited to cedants that file annual statements with the NAIC.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}