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Jackson's $26.7B reinsurance deal is large, but not without recent precedent

Jackson National Life Insurance Co.'s transfer of approximately $26.7 billion of statutory-basis liabilities to Athene Holding Ltd. through a block reinsurance transaction effective June 1 represents the latest in a series of large deals of the kind, several of which have had a material effect on the overall financial results for the U.S. life and annuity industry.

The deal's structure, wherein fixed annuity and fixed indexed annuity reserves will be reinsured from a domestic entity into Bermuda-based Athene Life Re Ltd. on a funds withheld coinsurance basis, implies the migration of the underlying business outside of the scope of U.S. statutory data, consistent with previous arrangements executed by Athene and certain of its peers. Thanks in large measure to transactions of the kind executed among related and unrelated parties, there has been considerable divergence in premium growth trends within the U.S. life industry on direct and net bases.

In 2019, for example, the U.S. life industry's direct premiums and considerations increased by 3.7% year over year, but net premiums and considerations surged by 13.1%. In that case, the divergence resulted mostly from the timing and nature of reinsurance deals that hit the books in 2018, depressing net business for that year.

Among the most significant of those transactions was the cession of various closed blocks of business by U.S. life subsidiaries of American International Group Inc. to what is now known as Fortitude Reinsurance Co. Ltd. on a modified coinsurance basis.

The AIG life group's net ordinary individual annuity premiums plunged to $60.9 million in 2018 from $11.79 billion in 2017, then rebounded to $16.77 billion in 2019. Across all life, annuity and accident and health lines, the AIG U.S. life group's net premiums sank to negative $8.46 billion in 2018 from $16.62 billion in 2017, then bounced back to a positive $21.11 billion in 2019.

Athene had a prominent role in a 2018 deal wherein a consortium of investors led by Apollo Global Management Inc. acquired what is now Venerable Insurance & Annuity Co. from Voya Financial Inc. In connection with that deal, Athene Life Re reinsured via modified coinsurance an 80% quota share of certain fixed annuities. Athene Annuity & Life Assurance Co. took a 20% quota share.

Venerable reported net premiums and considerations of negative $18.52 billion in 2018. Although the U.S.-domiciled Athene unit reported a $3.47 billion boost to its net business volume from its part in the Voya deal, the majority of the ceded premiums flowed outside of the scope of U.S. statutory data to its Bermuda affiliate.

In the absence of results attributable to AIG and Venerable, the year-over-year growth rate in 2019 net premiums and considerations for the U.S. life industry would have been only 4.9%.

The widest gap in industry direct and net growth rates in recent years occurred in 2014 when the former climbed by 2.4% and the latter surged by 15.1%. In that case, much of the divergence resulted from the structure of Athene's October 2013 acquisition of Aviva USA Corp.

Following that transaction, the company currently known as Athene Annuity & Life Co. ceded 100% of its funding agreements, 80% of all in-force and future annuity business, and 80% of its fixed spread businesses to Athene Life Re through modified coinsurance agreements. It also transferred via assumption reinsurance substantially all of its life insurance business to a subsidiary of Global Atlantic Financial Group Ltd. Modified coinsurance reserves associated with the affiliated reinsurance transactions totaled $29 billion, and the cedant took reserve credits totaling $7.62 billion for the Global Atlantic relationship.

Whereas Athene Annuity & Life would have posted $1.80 billion in net premiums and considerations on a pro forma basis in 2013 in the absence of those and certain other reinsurance deals, its as-reported tally stood at negative $26.14 billion. At the U.S. life group level, Athene's net premiums swung to $320.4 million in 2014 from negative $26.13 billion in 2013.

The Jackson group's individual annuity statutory reserves for individual deferred fixed annuities and fixed indexed annuities totaled $14.09 billion and $12.23 billion at year-end 2019, respectively. It had another $1.56 billion and $960 million associated with group fixed annuity and fixed indexed annuity business, respectively.

Certain of Jackson's fixed annuity business will not be incorporated in the Athene deal, including U.S. group payout annuity business reinsured in a 2018 transaction with John Hancock Life Insurance Co. (U.S.A.) and a 2019 deal with John Hancock Life Insurance Co. of NY. The Jackson group had $4.73 billion in group life contingent payout annuity reserves at year-end 2019.