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Pension risk transfer market set for more deal-making in 2018

Life insurers are again in the market for pension risk transfer, or PRT, deals in 2018 after the industry saw a 68% jump in single premium buyout product sales in 2017.

Pension buyout deals occur when a life insurer buys the pension liabilities of an employer plan, usually through a big group annuity. The insurer takes on responsibility for all future pension checks. Insurers benefit because they are in the business of investing incoming assets to fund long-term liabilities.

Single premium pension buyout product sales were $23 billion in 2017, up from $13.73 billion in 2016 and $13.63 billion in 2015, according to a March 1 news release from LIMRA Secure Retirement Institute. The 2017 total beat LIMRA's earlier expectations from November 2017, when it said it expected such sales to be about $19 billion for the year. It also said in the earlier report that it expected those sales to top $20 billion in 2018.

LIMRA, an insurance and retirement research organization, said in the latest news release that 11 in 15 companies saw double-digit sales growth during 2017.

"With the exception of 2012, when there were two significant jumbo deals [greater than $1 billion], annual sales have never exceeded $23 billion since the institute began tracking sales of these products," LIMRA research analyst Eugene Noble said in the release.

Some of the largest deals announced during 2017 are being done by insurers with capacity to compete.

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Life insurers remain bullish on their prospects for such deals. If a pension plan is well-funded, it makes it makes it more attractive to an insurer, one insurance executive noted in a 2017 interview on PRT deals. For underfunded plans, companies could try to bulk them up before a sale to make them more attractive to insurers.

In a Feb. 22 conference call, Athene Holding Ltd. President William Wheeler continued to express optimism in gaining market share and inking new PRT deals.

"With rising interest rates and positive impacts from tax reform, we think plan sponsors are incentivized to come to market and expect a healthy number of deals will be executed in 2018," Wheeler said, according to a transcript of the call.

Wheeler had spoken of the aggressive pursuit of PRT opportunities in the company's third-quarter 2017 earnings call as well, noting in September that the company had hired Sean Brennan as head of PRT. Athene continues to hire to build up its team with three open professional PRT positions, according to its website.

Stephen Pelletier, Prudential Financial Inc. executive vice president and chief operating officer of U.S.-based businesses, said during a conference call Feb. 8 that the company sees a "very, very healthy pipeline at the start of the year" for PRT transactions.

Pelletier pointed to the tax angle in his comments and noted increased funding levels after "a significant number of plan sponsors" have made contributions in 2017 to their plans. The push for transactions is also bolstered by rising premiums in government agency Pension Benefit Guaranty Corp. and increased awareness of longevity risk, he said.

Despite announcing in January a global review of policies and procedures to identify unresponsive and missing group annuity annuitants and pension beneficiaries, MetLife Inc. is eager to pursue PRT deals in 2018. Its view of the PRT business as key for the company has not changed, CFO John Hele said Feb. 14 on an investor call. Hele noted that the company did a record $3.3 billion in PRT sales in 2017, and he sees 2018 as "another active year."

Industry actuaries say rising longevity, market volatility and retirement plan costs are driving factors in the transactions. Pension plan sponsors are looking to remove the balance sheet risk from pension plans. Consulting firm Mercer and others have noted that the new lower corporate tax rate of 21% will spur plans to seize the opportunity to receive a greater tax deduction while they still can. The tax factor could also accelerate pension funding.

About 75% of plan sponsors are accelerating pension funding or preparing to, according to a report from Mercer. However, there is a short window of opportunity for making tax-deductible contributions for the 2017 tax year, Mercer noted, given that the tax year usually extends until eight and a half months after the end of the tax year or the due date of the 2017 corporate tax return, if earlier, for defined benefit plans.

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Click here for a downloadable spreadsheet that shows life company market share by line of business