North American life insurers will continue divesting legacy blocks of annuity, life, and employee benefits’ businesses given their sizable inventory as well as a focus on optimizing value amid generally favorable economic and market fundamentals, Moody’s Investors Service says in a report published on Wednesday.
Big life insurers actively divested legacy blocks of annuity, life and employee benefits’ business last year, and the rating agency expects that deal activity to continue in the year ahead.
“We estimate that close to US$270 billion in life, annuity, and group benefits business changed hands in 2017, a trend that has continued this year,” says Laura Bazer, vice president at Moody’s, in a statement.
These sorts of transactions included companies selling blocks of business and entire companies, reinsurance, and often a combination of both approaches, Moody’s says in the report. Specifically, private equity investors have teamed up with specialty block acquirers, and reinsurers, to complete complex transactions.
Sellers could also use initial public offerings (IPOs) and spin-offs, “since the equity market has been in record territory in recent quarters,” the report says.
As of the end of 2017, life insurers held more than US$420 billion worth of variable annuity, annuity/life, long-term care (LTC), and other legacy/runoff blocks of business, which may be ripe for divestiture. Large legacy owners include Manulife Financial Corp., MetLife, Inc. and Brighthouse Financial, Inc.
“We evaluate each transaction on a case-by-case basis for the seller. The transaction may be credit positive, negative, or neutral, depending on their materiality, whether or not capital is released, and if so, how it is redeployed,” Bazer says. “We also evaluate the counterparty and reputation risks of the sale for the seller, when a business is sold to an unknown buyer/group of buyers with a weaker credit profile or rating than the seller.”