Annuities have grown significantly amid rising interest rates, creating a need for additional capital in the reinsurance market, which has led to increased use of reinsurance and the growing popularity of sidecars to manage risk and support larger deals, according to a recent report by AM Best.
The annuity growth has created a need for additional capital to enter the reinsurance market and provide capacity, as annuity writers seek to manage growth and maintain adequate capitalisation.
To manage strong premium growth through reinsurance, the individual annuity sector has steadily increased its reinsurance leverage—ceded reserves to capital and surplus (C&S)—over the past four years, explains AM Best.
The ratings agency also reveals that surplus relief—commissions from reinsurance ceded to C&S—has also risen notably over the last two years, with first-year premium surplus relief reaching its highest level in a decade as companies work to manage new premium growth.
A growing strategy in recent years has been the formation of sidecars—reinsurance entities that draw on capital from third-party investors. These sidecars provide timely capital to execute larger deals and generate additional fees for the general partner.
By the end of 2023, approximately a dozen US-based life/annuity companies had ceded business to sidecars, a number that has tripled since 2021, with several more formed in 2024.
Total ceded reserves to sidecars grew to nearly $55 billion in 2023, up from $17 billion in 2021. Martello Re (MassMutual), Ivy Re II (Global Atlantic/KKR), and Prismic Life Re (Prudential/Warburg Pincus) account for nearly three-quarters of these reserves, primarily covering liabilities for indexed and fixed annuities.
AM Best expects this trend to grow much more significantly as more deals closed in 2024, supported by a favorable environment for annuity growth.
Some life/annuity companies have begun by ceding first and/or second block deals to sidecars, providing capital relief to the insurer, and to get the sidecar some scale and provide diversification, and then look to expand and reinsure diversifying business or third party business (either flow or legacy blocks)
AM Best noted that the rise of sidecars has opened a new avenue for private capital to enter the life/annuity market.
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