Despite private equity-backed reinsurance transactions in Asia increasing tenfold between 2019 and 2023, Guy Carpenter says the appetite for these deals is “unlikely to be sated any time soon.”
In a report published this week, the global reinsurance broker pointed to two key reasons why the growth of these types of deals is likely to continue.
The first is the US$2 trillion in assets and liabilities under management in Asia, which currently yield sub-par capital returns.
The second are the regulatory changes being introduced across the region; the switch to RBC regimes, combined with the introduction of the IFRS 17 accounting framework, means insurers in Asia are adopt new balance sheet strategies.
“These reforms are leading life insurers to de-risk their balance sheets and seek to exit longer-term, or more capital-intensive, liabilities,” Guy Carpenter said.
Asset-intensive reinsurance deals are agreements between primary carriers and reinsurers where the reinsurer assumes a portion of the insurer’s liabilities associated with investment-based products, such as annuities.
For insurers, asset intensive reinsurance deals can free up capital to improve solvency ratios or reinvest in areas such as digitalisation or new product lines.
For private-equity-backed reinsurers they provide access to in-force books of business that offer permanent capital that can be reinvested. Additionally, acquiring insurance assets in different markets allows reinsurers to benefit from greater diversification.
Deals spike
In its report, Guy Carpenter said the value of private equity-backed reinsurance transactions in the region increased tenfold between 2019 and 2023.
Notable transactions in recent years have involved insurers such as AXA HK, Manulife, FWD, T&D, Daiichi, and Japan Post and reinsurers such as KKR-backed Global Atlantic, Apollo-backed Athene, Blackstone-backed Resolution, Carlyle-backed Fortitude, and Reinsurance Group of America (RGA).
2024 itself has also seen a flurry of asset intensive reinsurance activity, many of which have involved private equity-backed reinsurers.
On 1 February, Resolution Re said it had signed a flow reinsurance deal with Dai Ichi Life. Later the same month, Global Atlantic completed a US$9.6bn with Manulife, representing the largest-ever LTC reinsurance transaction. On 23 March 2024, RGA and Japan Post Insurance announced they had signed a life annuity reinsurance deal valued at US$4.62bn.
In the past week alone, it Japan’s Tokio Marine & Nichido Life had agreed to two separate asset-intensive reinsurance deals for whole-life policies, one with RGA and another with Pacific Life Re.
There is further appetite from the market with Manu Sareen, Co-President and Head of Institutional Markets at KKR-backed Global Market, told (Re)in Asia in February, “We are in the process of announcing transactions in the next one or two quarters with Japanese insurers.”
However, despite the significant growth in these transactions, Guy Carpenter still sees further opportunity for growth in the region.
“Tip of the iceberg”
As of 31 December 2023, private equity-backed reinsurance transactions in Asia accounted for US$25bn in assets, representing only 2% of the addressable market.
While private equity investment in reinsurance may be relatively new to Asia, it is well established in regions, particularly in the US. At the end of 2022, private equity firms owned 137 US insurance companies with US$533.7bn in assets, representing 6.5% of total US insurance assets, according to data from the National Association of Insurance Commissioners.
And PE appetite for Asia is growing. “Just as private equity firms are becoming more bullish on the life insurance sector, Asian insurers have become increasingly bullish on investing in private equity and private credit, with the Asian trend toward investing in these areas outpacing the change in EMEA and the US,” says Guy Carpenter.
However the growth of private equity activity in insurance markets is not without challenges. Increased global activity has led to more scrutiny from regulators, including a US Treasury Department panel and the International Monetary Fund. Concerns about systemic risks have been prompted by a few small European deals that failed, endangering policyholders’ funds.
However, “these unsuccessful transactions represent a small fraction of the overall trend,” the report notes, adding that most insurers still regard private equity-backed reinsurance as a crucial capital source, with funds secured and isolated within well-capitalised reinsurers backed by reputable global firms.
In the vast majority of cases, policyholders will see no change when private equity-backed reinsurers are involved. There is also considerable upside – strengthened balance sheets of insures and their ability to reinvest in new products and initiatives, will improve customer experiences and ensuring payment of non-guaranteed benefits like dividends and bonuses, the report notes.
In addition, reinsurers “will find the appropriate balance of asset classes to invest in, and the private equity-backed reinsurers provide access to asset classes and investment expertise that often don’t exist within the traditional carriers themselves,” Guy Carpenter adds.
The report concludes that even amid global regulatory scrutiny, private equity interest in Asia’s life insurance sector will likely remain strong over the next decade and that the new injection of funds can only benefit the long-term health of the sector overall.
“While the recent uptick in transactions has managed to grab the headlines, this may just be the tip of the iceberg,” Guy Carpenter says.
