New Capital Fueling Life Reinsurance Market
The life reinsurance industry is at an “inflection point” that will become still more evident in 2005, according to Paul Rutledge, president of Transamerica Reinsurance, Charlotte, N.C.
That inflection point, he continues, is evident in the growing coordination of the reinsurance and capital markets.
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Part of the reason, he explains, is that it takes more capital and infrastructure to start up as well as more expertise. Even a few years ago, it would take $100 million to $200 million to start up a reinsurance operation, but today it takes more, Rutledge says. “Today, there are a more complex set of solutions that are being delivered.”
Interviews with several industry executives affirm that demand for reinsurance relief from direct writers of life insurance is prompting new capital investment even as the list of longtime players consolidates.
Two announcements underscore the interest in this market. On Jan. 3, Scottish Re Group, Hamilton, Bermuda, announced that a private equity firm, The Cypress Group, New York, had made a $180 million investment in the reinsurer. The announcement reflects both the new infusion of capital, as well as the consolidation in the market, since the company said the money was raised to support the U.S. individual life reinsurance business acquired from ING Groep, N.V., Amsterdam, on Dec. 31, 2004. For its investment, Cypress Group received a 9.9% stake in Scottish Res ordinary common stock.
The need for capital also was underscored by a new report from UBS analyst Andrew Kligerman who notes, among other points, that the mortality experience on life reinsurance held by Scottish Re can deteriorate as business ages and that UBS believes reserves on Triple-X business could increase substantially in the future (see related story for more details).
The Scottish Re deal followed a year-end entry by a new player in the reinsurance market. Wilton Re Holdings Limited, Hamilton, Bermuda, raised more than $600 million in capital to provide a new source of life reinsurance capacity to life insurers through its Wilton Re U.S. Holdings unit. Sponsoring investors include Trident III, L.P., a private equity fund managed by MMC Capital Inc., and Chris Stroup, chairman of Wilton Re Holdings Limited. John Tiller, also a longtime reinsurance veteran, will act as CEO of Wilton Re U.S. Holdings.
The new operation first was conceived during the summer of 2004, fund raising was completed in mid-December 2004 and the company was up and running on Jan. 1, says Stroup. The company will concentrate on two areas: traditional mortality business and run-off solutions.
Consolidation in the life reinsurance marketplace has created a demand for additional reinsurance, he adds. The reinsurance capacity that Wilton Re offers provides ceding direct writers with monetizing for statutory accounting purposes, the present value of future profits as well as freeing up the capital and administrative capabilities needed to support those contracts, Stroup says.
Wilton Re will not be active in other areas such as reinsuring catastrophe insurance, variable annuity guaranteed minimum death benefits and income benefits, and long term care and health insurance because there is not a reasonable risk-adjusted return, he continues. Ultimately, he says the company will look like Life Re Corp., the company of which he was executive vice president and CFO before it was purchased by Swiss Re.
Stroup says he believes that within 36 months, reinsuring traditional life and fixed annuity business will bring Wilton Re to its targeted scale.
Although other techniques such as hedging and securitizations are being explored by direct writers as options to create more capacity, Stroup maintains “reinsurance is too effective a capital and risk management tool to be eliminated.”
Hedging may help alleviate risks associated with guarantees in variable products, but it is not a perfect science, says Stroup, adding there can be significant accounting ramifications associated with detailed GAAP accounting rules.
Securitizations can be effective if the direct writer is a very large institution, he says. Even for companies that use securitizations to ensure greater control over the ultimate collateral, there is still a large need for reinsurance, Stroup continues. For both options, there is “a certain size and sophistication” that is needed.