NEW YORK--(BUSINESS WIRE)--The re-emergence of an active reinsurance market for variable annuity (VA) risk is a potential positive development for U.S. life insurers that sell VAs, according to Fitch Ratings. Improved pricing and less aggressive investment guarantees are leading to a re-opening of the reinsurance market in this segment, giving writers of VAs an alternative to in-house VA hedging programs.
While Fitch views positively the presence of an active reinsurance market for VA risk, it is unclear how much of an impact this will have on the risk profile of VA writers. It could result in a reduction in the industry's exposure to VA risk or, conversely, it could simply allow insurers to sell more VAs than they otherwise would. Fitch expects the ultimate answer to lie somewhere between the two extremes.
The VA reinsurance market has been very volatile in terms of supply. It was very active in the 1990s but virtually dried up following the equity market correction in 2000-2002. After reinsurers re-entered the market in 2006-2007, it dried up once again following the equity market correction in 2008-2009.
Fitch has seen an increase in reinsurance transactions involving variable annuity risk. CIGNA, previously a reinsurer of variable annuity risk, entered into a reinsurance transaction in February 2013 with a subsidiary of Berkshire Hathaway on an in-force book of variable annuities. In the fourth quarter of 2013, Lincoln National Corp.'s (LNC) largest insurance operating subsidiary entered into a reinsurance treaty with Union Hamilton Reinsurance, Ltd., a Bermuda-domiciled subsidiary of Wells Fargo & Co. This transaction was particularly notable in that the reinsurance agreement involved future new business. Under the terms of the treaty, Union Hamilton will reinsure the living benefit guarantee on 50% of new VA sales from Nov. 1, 2013 through Dec. 31, 2014, up to $8 billion of new living benefit guarantee sales. LNC will retain 100% of the product cash flows, excluding the living benefit guarantee.
Fitch believes that more VA writers are exploring potential opportunities to cede a portion of the risk associated with their VA guarantees, but no other significant announcements of such treaties have yet emerged.
Additional information is available on www.fitchratings.com.
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