Use of Life/Annuity Sidecars As Reinsurance Solution Expected To Increase

Strong US annuity sales has led to increased formations of sidecars by life insurance companies to manage the growth and maintain risk-based capitalisation levels, with ceded reserves increasing threefold in the two-year period to 2023, according to a new AM Best report. 

The report, Use of Life/Annuity Sidecars as Asset-Intensive Reinsurance Solution Expected to Increase, states that because of strong premium growth amid rising interest rates, the individual annuity composite has steadily seen its reinsurance leverage (i.e., ceded reserves to capital and surplus) increase by 66% in the most recent five-year period.  

Additionally, first-year premium surplus relief is the highest it has been in 10 years as companies seek to manage new premium growth. Overall, total ceded reserves to sidecars increased to nearly $55bn in 2023 from approximately $17bn in 2021, with Martello Re (Mass Mutual), Ivy Re II (Global Atlantic/KKR), and Prismic Life Re (Prudential/Warburg Pincus) combining to make up nearly three quarters of the amount. 

“The vast majority of reserves ceded are covering liabilities for indexed and fixed annuities. We expect this trend to grow much more significantly as more deals closed in 2024 and the environment continues to be conducive for annuity growth,” said Jason Hopper, Associate Director, Industry Research and Analytics at AM Best. 

Sidecars have historically been more prevalent in the property/casualty segment, and AM Best’s report notes that understanding the differences of life/annuity-formed sidecars with liability-driven investment strategies versus ones that have typically been used to fund short-term risks with liquid assets is important. While dependence on sidecars varies among insurers, a disproportionate use could lead to counterparty concentration. 

The proliferation of sidecars also has allowed private capital another avenue to enter the L/A business. 

“Even if asset-manager sponsors maintain their commitment to the long-term nature of life/ annuity insurance business through partial or outright ownership of some companies, the sidecars to which they reinsure a small share of the business may follow a traditional private equity model,” added Hopper.