Fitch Ratings is looking hard at annuity issuers' sources of capital and risk management help to see how everything is holding up.
One of the capital sources getting attention is "sidecars," or vehicles that let institutions, ultra-high-net-worth individuals, ultra-HNW clients' family offices, financial institutions and other sophisticated investors help fuel insurance and annuity arrangements.
If the arrangements perform as expected, the providers of the sidecar capital may make money.
If the arrangements perform differently than expected, the sidecar capital providers may lose money.
Of course, starting in early April, many of the world's financial arrangements started to perform differently than capital providers might have expected before Jan. 1.
"Sidecars can introduce counterparty credit risk and potential regulatory scrutiny, which could negatively affect an insurer's financial stability if the vehicle underperforms," Fitch said in a commentary on sidecars put out in February, before the Trump administration's unveiling of tariff changes and proposals put the world's investment markets on a rollercoaster.
What it means: Sidecar investors might be the quickest annuity capital providers to react to change.
The April turbulence and any new turbulence could change how those investors see their investments.
Anything that affects the sidecar investors' views could be an early indicator for annuity capital supply trends.
Jack Rosen's views: Jack Rosen, a director at Fitch Ratings, talked about how Fitch sees sidecars and some of the arrangements that make annuities go, such as reinsurance from firms based in jurisdictions like Bermuda, Thursday, during a global insurance regulatory developments webinar organized by Fitch.
"Alternative investment managers" began forming more relationships with life insurance and annuity issuers after the 2007-2009 global financial crisis, when interest rates on plain-vanilla corporate bonds fell close to zero.
The "alt-IMs" wanted to get relatively easy-to-keep assets from the insurers.
The insurers wanted alt-IMs to help them use relatively complicated, hard-to-sell assets to get better returns than what they were getting from corporate bonds.
Some "alt-IMs" formed offshore reinsurers, some traditional U.S. and European reinsurers started offshore reinsurers in places like Bermuda, and both the alt-IMs and the reinsurers appealed to outside investors by forming sidecars.
Life and annuity issuers have continued to work with alt-IMs and offshore reinsurers since interest rates began to rise in 2022.
"We see more partnerships in the last handful of years," Rosen said.
The relationships may increase annuity issuer's returns, but "the expanded use of those arrangements also increases complexity," Rosen said.
Fitch does not yet have post-tariff-announcement sidecar performance data.
If increased investment market volatility hurt the performance of the sidecars, that could decrease investors' interest in sidecars. But, if the sidecars performed differently from the rest of the market, and zigged when other investments zagged, that could increase sidecars' investor appeal.
Regulators in the United States and Bermuda are working to address any concerns about sidecars and similar arrangements for the annuity issuers by asking for more reports and more details about the arrangements, including what would happen to the assets in the arrangements in a wide range of economic scenarios, Rosen said.
Bermuda tightened its capital rules in 2024, and that might cause annuity issuers to "migrate to other regimes with enhanced regulatory flexibility on the margin," such as the Cayman Islands.
Rosen said the offshore deals Fitch has seen up close include provisions designed to make capitalization for arrangements formed outside the United States or Bermuda comparable to the capitalization for U.S.-based arrangements.
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