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RGA, John Hancock Enter $5.4B Coinsurance Deal on Fixed Annuities

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Reinsurance Group of America, Inc. (RGA) has agreed to reinsure a $5.4-billion block of fixed deferred annuities from John Hancock Life Insurance Co. The deal, announced on Monday, is expected to close by the end of this month.

In an SEC filing, St. Louis, Mo.-based RGA said it plans to invest approximately $350 million “from existing resources” to support the transaction. In exchange, RGA will receive approximately $5.4 million in invested assets that include mostly investment-grade fixed income securities and commercial mortgage loans.

The company further said it expects the coinsurance deal will be immediately accretive to its consolidated earnings per share (EPS), beginning in the second quarter. RGA will reinsure for 90% of the death benefits, withdrawals, surrenders and other benefits related to the annuities covered under the agreement.

In a written comment on the RGA-John Hancock deal, Sterne Agee analysts John M. Nadel and Alex Levine projected that the transaction will be accretive to estimated 2013 EPS of between 2.6% and 5.5%.

Although there has been heightened transaction activity in the life and annuity space, including several life insurance blocks of business, “which RGA has historically favored given their mortality expertise,” the analysts were, however, surprised by RGA entering into a fixed annuity (FA) coinsurance deal.

“On the one hand, RGA’s deployment of a significant chunk of their on-balance sheet capital capacity into a non-life transaction could be an indication of lack of quality in the books of business currently on the market,” wrote Nadel and Levine. “On the other hand, it could be an indication that competition is more aggressive in the pure life insurance area currently.

“It’s difficult to discern, but we are definitely surprised to see RGA deploy such a sizable portion of their excess capital into a spread-sensitive business such as FAs given today’s extremely low long-term rate environment,” the analysts added.

A recent study by Weiss Ratings found that profits at the largest life and annuity insurers dropped by 84% in 2011. John Hancock registered the largest decline, going to a loss of nearly $2.9 billion in 2011 from a profit of $103.8 billion in 2010. John Hancock also announced late last year that it was limiting its sales of annuities.

See also:

The God Clause and the Reinsurance Industry (Bloomberg)

Court Rules on Greenberg AIG Case

10 Reasons Why Insurance M&A Remain Slow