The growth of US annuity sales has driven insurers to increase their use of sidecars as a tool to manage risk-based capital levels and accommodate expanding reserves.
According to a new report from AM Best, ceded reserves tripled between 2021 and 2023, reaching nearly US$55 billion.
The report highlights how the individual annuity sector has seen a 66% rise in reinsurance leverage over the past five years. The demand for first-year premium surplus relief has also reached its highest point in a decade as insurers seek to balance new premium growth.
The largest contributors to the rise in ceded reserves include Martello Re (MassMutual), Ivy Re II (Global Atlantic/KKR), and Prismic Life Re (Prudential/Warburg Pincus), which collectively account for nearly 75% of the total amount.
Most ceded reserves support liabilities for indexed and fixed annuities, and the trend is expected to accelerate as additional transactions close in 2024.
In the previous year, both Bermuda and the Cayman Islands experienced significant growth in their reinsurance markets, driven by the increasing use of sidecar models and expansion into new lines of business.
These structures provide reinsurers with additional capacity and diversification benefits, while offering investors opportunities to participate in the reinsurance market.
While sidecars have historically been more common in the property/casualty sector, the report emphasizes the need to differentiate life/annuity sidecars, which rely on liability-driven investment strategies, from those typically used to support short-term risks with liquid assets.
Insurers’ reliance on sidecars varies, and excessive dependence could create counterparty concentration risks.
The expansion of sidecars has also provided private capital with another means of entering the life and annuity sector. Even when asset managers hold stakes in insurers for the long term, some reinsurance transactions follow private equity investment models with shorter time horizons.
However, there are some who are wary of the segment’s continued growth. In response to the growing complexity of asset-intensive reinsurance structures, the Bermuda Monetary Authority (BMA) has issued warnings about potential governance risks.
The authority is considering targeted supervisory interventions, such as dividend restrictions and higher solvency requirements, to mitigate risks associated with short-term capital commitments in these reinsurance agreements.
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