While the combination of higher interest rates and more favourable mortality trends has improved conditions for life and pension reinsurers, it has also led to increased competition. According to global ratings agency AM Best, some of these reinsurers are backed by alternative investment managers or large private equity firms.
In a new report, the agency notes that new capital continues to flow into the segment, mainly through reinsurers owned by investment managers focused on the fixed-income business.
According to AM Best, these newer market entrants have sought to co-insure assets that can be converted into high-yield positions, primarily in the form of public, private or alternative fixed income products.
In addition, the agency states that these reinsurers can also offer attractive ceding commissions based on higher expected investment returns once the transferred assets are integrated into a wider range of investment opportunities.
AM Best stressed that L/A reinsurers remain well capitalised and that their risk-adjusted capitalisation is expected to remain healthy through 2025, despite ongoing risks in their investment portfolios and elevated mortality rates for some of them.
Ed Kohlberg, Director of AM Best, commented: “How newer market entrants will change their strategies over the long term depending on macroeconomic trends, deal availability and regulatory changes remains to be seen, but all indications are that this ‘new capital’ is here to stay. Billions more have already been committed but are waiting on the sidelines for the next opportunity.”
It should be noted that the US life reinsurance market has been under pressure in the past as primary insurers transferred fewer risks to third-party reinsurers, which ultimately led to a long decline in cession rates.
Recently, however, rising interest rates have led to an increase in annuity sales, which has reportedly prompted some primary insurers to reinsure their additional business.
AM Best found that asset managers supported rapid growth by providing the necessary capital and not limiting growth with high dividends.
Due to the stable economic and regulatory situation, as well as political stability and access to skilled legal and financial professionals, both Bermuda and, to a lesser extent, the Cayman Islands have gained popularity, the agency stressed.
Stratos Laskarides, senior financial analyst at AM Best, said: “The significant growth in pensions is likely to continue and more companies will turn to reinsurers to manage growth and capital levels. With new company formation, partnerships and private capital entering the market, the reinsurance market will remain competitive, with a larger share of business being ceded to subsidiaries and third-party reinsurers.”
