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Request for large reinsurance rate hike preceded life group's sale

Two Enstar Group Ltd. life insurance subsidiaries received requests for 45% rate increases on a reinsurance contract months before the announcement of their sale, regulatory filings reveal.

Pavonia Life Insurance Co. of Michigan and Pavonia Life Insurance Co. of New York reported in their respective annual statements that they received notice from Swiss Re Life and Health America Inc. during the third quarter of 2016 of the rate increase on term life business that Swiss Re Ltd. had reinsured for the previous six years.

The two companies said they were given the option, which they selected, to recapture the ceded business at no additional cost. They commuted the applicable treaty, effective Sept. 1, 2016.

Enstar agreed in February to sell its immediate parent, Pavonia Holdings (US) Inc., to Global Bankers Insurance Group LLC for $120 million. The transaction, which remains subject to regulatory approvals, is expected to close during the second half of 2017.

The recaptured business pertains to a term life product that the companies, which historically focused on the production and distribution of group credit life and group accident and health insurance, issued between May 2010 and January 2012 using data-driven underwriting. They leveraged data gathered through sources such as motor vehicle registration databases to validate information provided on policy applications and, in turn, enhance the classification and pricing of risk.

Pavonia Life of Michigan, which operated at the time as an HSBC Holdings Plc subsidiary under the name Household Life Insurance Co., and Pavonia Life of New York, which also was an HSBC unit then known as First Central National Life Insurance Co. of New York, entered two reinsurance contracts associated with the data-driven term life product. The reinsurers, Swiss Re Life and Health America and Canada Life Assurance Co., each assumed 25% first-dollar quota shares of each underlying policy, while the insurer retained 50% of the exposure up to a per-policy limit of $250,000 of the gross face amount.

Swiss Re Life and Health America reported $1.01 billion and $143.8 million of life in force at the peak of the reinsurance relationships with Household Life and First Central National Life Insurance at year-end 2011, according to Schedule S, Part 1, of its annual statement for that year.

The insurance group's decision to discontinue sales of the term life product led A.M. Best to downgrade its financial strength ratings for Household Life and First Central National Life by one notch to A- in November 2011. The rating agency later lowered the ratings by another notch to B++ as HSBC determined that it would sell the U.S. insurance operations in August 2012, weeks before the bank announced the sale of the group that now consists of the two Pavonia Life companies to Enstar.

By year-end 2015, the amounts in force that Swiss Re Life and Health America reported with respect to the relationships with the by-then-renamed Pavonia Life of Michigan and Pavonia Life of New York were $635.8 million and $86.6 million, respectively. The reinsurer reported nearly $1.30 trillion of life in force from all of its U.S. and international cedants as of that date.

A Swiss Re spokeswoman said the company does not comment on business involving current and former cedants.

In addition to the Swiss Re Life and Health America recapture, Pavonia Life of New York said in the 2016 annual statement that it sent notice to the New York Department of Financial Services of its intent to novate a reinsurance agreement with Canada Life. The filing did not specify whether the novation request pertained to the 25% first-dollar quota share, but the company indicated that it ultimately withdrew that request and commuted the agreement during the third quarter of 2016.

The companies' largest life reinsurance relationship that remained in place at year-end 2016 was with Munich American Reassurance Co. based on the $573 million and $103.8 million of life in force reported by Pavonia Life of Michigan and Pavonia Life of New York. That arrangement, under which the companies cede risk related to simplified-issue term life policies that they introduced in 2007, dates back to April 2008.

Pavonia Life of Michigan reported $22.8 million in direct ordinary life premiums in 2016, all of which consisted of renewal business. Renewals accounted for essentially all of Pavonia Life of New York's $4.1 million in direct ordinary life premiums.