“Reinsurers are benefiting from an active pipeline of legacy
life and annuity blocks of business coming to market.”
Kuvare Life Re is its Bermuda-based reinsurance subsidiary, which has
completed a number of deals, including the assumption of a block of
fixed annuities with about $850 million in reserves in late 2017. The
deal was the biggest since it was formed in 2016.
Industry activity such as activist shareholders and European Solvency
II have forced insurers to shed certain business lines in order to free
up capital and have thereby created opportunities. In addition, a better
alignment between the valuations of buyers and sellers over the past
few years has generated more deals.
Langhorne Re was launched by a group of investors, including RGA
and RenaissanceRe Holdings (both listed on the New York Stock
Exchange), affording the company meaningful access to capital that
will support its planned strategy of large in-force L/A block reinsurance
on a global basis. AM Best expects similar structures to emerge to allow
participation in large annuity or life transactions. This underscores the
availability of business, notwithstanding the challenges associated with
being the successful bidder.
In addition to interest-sensitive transactions, other opportunities exist
to assist direct writers saddled with legacy, underperforming books
of business to enhance longer-term returns, as well as to remove the
stigma that earnings may be pressured by poor performing blocks.
Reinsurers remain active in providing financial solutions, including the
continued financing of redundant reserves, providing capital management
solutions to assist companies working through regulatory and taxation
changes, and providing avenues to exit underperforming books.
Companies also continue to see growth in the longevity space—
especially in the UK, global life insurers that have capitalised on
this growth in the UK are now trying to replicate that success in
the US market. There is ample business opportunity in the US and
internationally in the longevity space, as well as other financial
Given the capital-intensive nature of the business and long-tail nature
of the liabilities, direct writers will surely continue to turn to the
reinsurance community for capital support and underwriting assistance.
The ratios often used to measure the reliance on reinsurance to support
capital needs are reinsurance leverage and surplus relief (Figure 2).
The reinsurance leverage ratio is defined as aggregate reserves ceded
plus amounts recoverable and funds held, divided by surplus. The
surplus relief ratio, defined as reinsurance commissions and expense
allowances on reinsurance ceded (reported as income on the statutory
statement) divided by statutory surplus, illustrates the degree to which
a company depends on reinsurance to maintain its surplus ratios (eg,
NAIC RBC/AM Best’s BCAR).
With the exception of 2016, the industry maintains a ratio in a fairly
narrow band of 4 to 6 percent. In 2016, several companies had some
large cessions that resulted in elevated commission and expenses on
reinsurance ceded business, thus raising the surplus relief ratio to
roughly twice the longer-term average.
Adjusted surplus relief simply nets out expenses and commissions on
reinsurance assumed (recorded as a statutory expense) before dividing
by surplus. As a result, the adjusted ratio for the industry is less volatile
and reports at an overall lower level. However, 2016 once again shows
an elevated ratio, reflecting some large ceded transactions without a
corresponding large offset in business assumed.
Life reinsurers, regardless of where they do most of their business,
must continually invest in technology to stay competitive in a world that
is rapidly changing. New digital solutions and automated underwriting
platforms are enhancing the customer experience and enabling companies
to maximise the value of their in-force business, thus contributing to
the long-term value of the organisations. However, such initiatives come
with a need for meaningful investment, including system upgrades and
the development of innovative solutions, partnering with technology
firms, and harnessing the benefits of predictive modelling.
Michael Adams, FLMI, is a senior financial analyst at AM Best. He
can be contacted at: firstname.lastname@example.org
William Pargeans is a director at AM Best. He can be contacted at:
Figure 2: L/A industry: reinsurance leverage & surplus relief
Surplus rrelief (%)
Reinsurance leverage (%)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Reinsurance leverage Surplus relief Adjusted surplus relief
Source: AM Best data and research
Michael Adams William Pargeans