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Principal Reinsures $25B in Life and Annuity Business With Talcott Arm

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What You Need to Know

  • The deal includes $16 billion in retail fixed annuity business.
  • It also includes a $9 billion block of universal life policies with secondary guarantees.
  • Executives say that blocks were volatile and generated low returns.

Principal Financial Group today announced that it has picked an affiliate of Talcott Resolution Life to help it shed the risk associated with its retail fixed annuity business and part of its life insurance business.

The Des Moines, Iowa-based life insurer has named the Talcott arm, Sutton Cayman, to reinsure a retail fixed annuity block backed by $16 billion in reserves and a block of universal life policies with secondary guarantees backed by $9 billion in reserves.

Principal will continue to administer and service the annuity contracts and life insurance policies involved, and it will have responsibility for managing $4 billion of commercial mortgage loans and private credit assets in the investment portfolios backing the products, the company said.

Principal and Sutton Cayman need regulatory approves to complete the transaction. They hope to close on the deal by June 30.

Company executives announced plans for the realignment in June 2021. Executives then estimated the realignment would involve business backed by $18 billion in reserves.

Talcott said in December that it was overseeing $91 billion in liabilities and surplus as of Sept. 30, 2021. Sixth Street, an investment firm that acquired Talcott in July 2021, said Talcott will emerge from the consummation of the Principal deal with responsibility for $140 billion of liabilities and surplus.

What the Announcement Means

Life insurers use huge portfolios of corporate bonds and other fixed-income instruments to support long-term life and annuity obligations. Interest rates on bonds have been low for years and fell even further in the wake of the turmoil resulting from the COVID-19 pandemic.

The Federal Reserve may be predicting that interest rates will rise soon, but, for now, many publicly traded life insurers are continuing to base their product strategies on the assumption that rates could stay very low for a long time.

The Thinking

Dan Houston, Principal’s chairman, president and CEO, said during a conference call with securities analysts, which was streamed online, that the company negotiated the reinsurance deal because the blocks exposed the company to a high level of credit risk and market volatility risk, and because low interest rates had hurt the blocks’ ongoing earnings.

Ken McCullum, the company’s chief risk officer, said the company found that the behavior of the life policy owners and annuity contract owners was changing, and requiring frequent actuarial review adjustments.

Principal believes Sutton Cayman is better suited to support the investment needs of those blocks, Houston said.

Although Principal has disposed of the retail fixed annuity block and some life insurance business, “we very much believe that business life insurance and supporting our business owner executive solutions and non-qualified deferred comp business really holds up well,” Houston said.

In June 2021, Principal said it would emphasize the sale of U.S. retirement plans, asset management services and U.S. employee benefits products, such as dental insurance, as well as products and services aimed at business owners and high-level corporate executives.

The Details

AM Best, the rating agency, said the Talcott-Principal transaction will be structured through 100% coinsurance cessions and retrocessions, each on a coinsurance or coinsurance-with-funds-withheld basis,

Principal’s role as the administrator of the ceded business and as an asset manager will help provide counterparty protections, AM Best said.

Future Deals

One analyst asked Principal executives during the conference call whether more deals could be in the pipeline.

“We continue to look for opportunities,” Houston said.

But he said Principal expects to focus on the product sales priorities listed in June 2021.

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Dan Houston (Photo: Principal Financial)