While the combination of higher interest rates and more favourable mortality trends have led to improved conditions for life/annuity (L/A) reinsurers, it has also created more competition, with some backed by alternative investment managers or large private equity firms, according to global ratings agency AM Best.

In a new report, the agency states that new capital continues to flow into the segment, primarily via reinsurers owned by investment managers focused on annuity business.

According to AM Best, these newer entrants have sought to coinsure assets that can be rolled into high-yielding positions, mainly across public, private or alternative fixed income products.

As well as this, the agency states that these reinsurers can also offer attractive ceding commissions based on higher anticipated investment returns once the transferred assets are rolled into a wider set of investment opportunities.

AM Best highlighted that L/A reinsurers remain well-capitalised and that their risk-adjusted capitalisation is expected to remain healthy through 2025, despite the risks that remain in investment portfolios and elevated mortality for some.

Ed Kohlberg, director, AM Best, commented: “How newer entrants will alter their strategies over the long term depending on macroeconomic trends, availability of deals and regulatory changes remains to be seen, but by all indications, this ‘new capital’ is here to stay, with billions more committed but on the sidelines waiting for the next opportunity.”

It’s important to note, that historically, the US life reinsurance market had been pressured as primary insurers transferred less risk to third-party reinsurers, which ultimately led to a long decline in cession rates.

However, in recent rimes, rising interest rates have led to a boost in annuity sales, which is said to have motivated some primary carriers to reinsure incremental business.

AM Best noted that asset managers have supported rapid growth by providing needed capital and not constraining growth with material dividends.

Based on the stable economic environment and regulatory landscape, as well as political stability and access to legal and financial talent, both Bermuda, and to a lesser extend, the Cayman Islands, have gained popularity, the agency highlighted.

Stratos Laskarides, senior financial analyst, AM Best, said: “The notable annuity growth is likely to continue, and more companies may look to reinsurers to manage growth and capital levels. With new company formations, partnerships and private capital entering the market, the reinsurance market remains competitive with a larger share of business ceded to affiliates and third-party reinsurers.”

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