Why reinsurers shift focus as annuity deals lose appeal

New annuity flows became more attractive as consumer demand strengthened.

Reinsurers are increasingly focusing on more complex legacy insurance portfolios as insurers look to free up capital and manage long-term risks, according to analysis from reinsurance broker Gallagher Re.

For most of the past decade, large in-force asset-intensive reinsurance transactions were mainly centred on annuity portfolios. 

However, changing financial market conditions have shifted attention towards more complicated lines of business, including universal life with secondary guarantees (ULSG), variable annuities, and corporate-owned and bank-owned life insurance (COLI/BOLI).

After a peak in 2021, reinsurance activity involving individual general account annuities declined, reflecting the reduced attractiveness of these deals in a higher interest rate environment. 

Earlier, during the low-interest-rate period between 2019 and 2021, insurers were able to generate capital gains by selling assets as part of reinsurance transactions. 

As interest rates increased, insurers instead saw stronger consumer demand for annuity products, which made reinsurance of new annuity flows more appealing than transferring existing blocks.

Risk management has also become a stronger driver of reinsurance activity. Issues linked to complex products such as ULSG, long term care and variable annuities often take years to emerge. 

Accounting practices may also understate the deterioration in these portfolios, making insurers reluctant to reinsure them if it requires recognising losses. 

However, the market appears to be shifting. Reinsurance volumes for ULSG business in 2023 were more than twice the combined total recorded over the previous five years.

Looking ahead, Gallagher Re expects in-force reinsurance transactions to become more complex rather than disappear. 

The firm believes long-term care portfolios could become a major area of activity, as insurers with large legacy blocks face continued pressure from investors who fear the business may be under-reserved. 

Advances in claims management and the asset-intensive nature of the product could help narrow valuation gaps between buyers and sellers.

Reinsurers’ access to capital remains closely tied to private equity funding, whilst any consolidation in the reinsurance market could reduce overall capacity and lead to more selective underwriting of new deals.