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AIG's new legacy reinsurer impacts US life industry's Q1 results in a big way

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AIG's new legacy reinsurer impacts US life industry's Q1 results in a big way

A Bermuda-based reinsurer's assumption of certain legacy liabilities of American International Group Inc. appears to have impacted the U.S. insurance industry's first-quarter statutory results to an even greater extent in the life sector than in property and casualty.

The manner in which American General Life Insurance Co. and its affiliates accounted for their transfer of certain closed blocks of business to DSA Reinsurance Co. Ltd. triggered largely offsetting extraordinary results in their statutory income statements on the line items for net premiums and considerations and reserve adjustments on reinsurance ceded.

As originally filed, the 660 individual U.S. life entities for which statutory data was available for the first quarters of both 2017 and 2018 reported $124.07 billion in net premiums and considerations in the aggregate, down 20.6% on a year-over-year basis. That figure includes a negative amount of $23.84 billion associated with four AIG U.S. life units. Reserve adjustments for reinsurance ceded, meanwhile, spiked to $33.58 billion, including $24.88 billion from the AIG companies, from a negative $5.97 billion a year earlier.

The U.S. life industry last posted a higher positive amount of reserve adjustments for reinsurance ceded in the fourth quarter of 2009. Quarterly volatility in net premiums and considerations has been a regular feature of the U.S. life industry's statutory income statements, with annual rates of change over the past three years ranging from a decline of 35.4% in the first quarter of 2015 to an increase of 61.2% in the subsequent first quarter.

AIG executives said that they formed DSA Re to consolidate legacy exposures into a single, well-capitalized legal entity and hope to achieve operating synergies, asset diversification and enhanced financial flexibility. DSA Re as originally conceived was to include more than 80% of AIG's total legacy insurance reserves, the company said.

American General Life, Variable Annuity Life Insurance Co., United States Life Insurance Co. in the City of New York and AGC Life Insurance Co. effected the cessions by entering separate modified coinsurance agreements with DSA Re in February for initial consideration of $25.3 billion. The agreements cover certain term, whole and universal life business along with long-term care, accident and health, structured settlements, single-premium immediate annuities and pension risk-transfer annuities.

Extraordinary life income statement results are not without precedent as insurers move business to and from reinsurers that are outside of the scope of U.S. statutory data, typically through the use of domestic captives and offshore companies. AIG's U.S. life group is no stranger to that phenomenon.

S&P Global Market Intelligence attributed negative net premiums and considerations of $15.61 billion to the AIG U.S. life group in the fourth quarter of 2016 as American General Life entered a reinsurance transaction with Hannover Re. In connection with that agreement, American General Life ceded various blocks of term, whole and universal life policies to Hannover Life Reassurance Co. of America, which in turn retroceded 100% of that business to an Ireland affiliate, thus taking it outside of the scope of the statutory data.

The Base Erosion and Anti-Abuse Tax, or BEAT, enacted in December 2017 as part of federal tax reform led the U.S. Hannover Re subsidiary to restructure its reinsurance treaties in the first quarter of this year through the recapture of business retroceded to foreign affiliates and subsequent retrocession of much of that exposure to Hannover Life Reassurance Bermuda Ltd., an affiliate that is a U.S. taxpayer. Hannover Life Reassurance of America reported net premiums and considerations of $70.6 million in the first quarter, up from $60.5 million in the year-earlier period.

Another U.S. life insurer with a European parent also took action in response to the BEAT tax that materially impacted the industry's first-quarter results.

Swiss Re Life & Health America Inc. said it restructured certain retrocession programs with Swiss Re AG affiliates in March, resulting in its recapture of various blocks of business. The company reported net premiums and considerations of $3.22 billion in the first quarter, up from $607.9 million in the year-earlier period. Its reserve adjustments on reinsurance ceded totaled a negative $3.02 billion.

Delaware Life Insurance Co.'s negative $12.32 billion in net premiums and considerations and $12.35 billion in reserve adjustments on reinsurance ceded also had material effects on the industry totals in those line items, though the values effectively canceled each other out from a bottom-line perspective. The company ceded $12.95 billion in annuity considerations during the first quarter.