A.M. Best Briefing: U.S. Life Reinsurers Adjust to Consolidating Market

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best is assigning a stable outlook for the U.S. life reinsurance industry, as the financial performance and capitalization of the major life reinsurers operating in the U.S. marketplace has been stable, underpinned by modest premium growth and solid mortality experience, which remain within pricing parameters.

The Best’s Briefing, titled, “U.S. Life Reinsurers Adjust to Consolidating Market,” states that despite favorable operating profiles, the U.S. life reinsurance industry does face some headwinds. For example, a lack of strong organic market growth reflects, in part, the long-term trend of lower cession rates from the direct market. A.M. Best estimates cession rates to be in the mid-20% range. This compares with cession rates as high as 60% a decade ago. The current level of cession rates, however, is more in line with historical levels.

Ongoing consolidation in the U.S. life reinsurance arena has resulted in a market dominated by a few large players, and the completed acquisitions over the past several years have more clearly segmented the market into larger versus smaller players. A.M. Best does not expect any further meaningful consolidation of life reinsurers over the near to midterm as the top five reinsurers now account for more than four-fifths of total reinsurance volume. While counterparty concentration is now more of a concern for direct writers, and new entrants may be welcomed, the life reinsurance market presents significant barriers to entry. While fresh capital has entered the reinsurance space, new entrants have focused primarily on annuity reinsurance, including annuity block acquisitions, and there have not been any meaningful new entrants into the traditional life mortality reinsurance space in a number of years.

Competition for acquiring blocks of business has heated up, as there is an unprecedented supply of fresh capital, much of which is backed either by private equity or private investors. While some newer entrants are focused on asset accumulation, a number of players are active in the acquisition of life insurance blocks. Given the spike in acquisition activity funded by alternative capital sources, A.M. Best believes certain midsize traditional reinsurers that have historically looked for acquisitions to complement more traditional reinsurance flows will face strong competition, and thus complete fewer deals than historical trends. This may translate into a heightened focus on traditional reinsurance business, more tailored client financial solutions and other value-added services.

The stand-alone outlook for the U.S. life reinsurance market reinforces the view that this market represents the majority of global life premiums. A number of U.S life reinsurers are subsidiaries of large multi-line global players and A.M. Best is maintaining its negative outlook on the global reinsurance sector (see press release dated Dec. 18, 2015). However, these larger U.S. life reinsurers are tied to higher-rated, tier 1 global reinsurers. It is the tier 2 global reinsurers, which generally lack scale and are less diversified by product and geographic region that drive the negative outlook for the overall global reinsurance marketplace.

For the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=244879.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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Source: A.M. Best Company, Inc.