Allianz frees capital with $35bn annuity reinsurance from Sixth Street & Resolution

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Global insurance and reinsurance giant Allianz has freed up roughly $4.1 billion in value after entering into a reinsurance arrangement to transfer $35 billion of fixed index annuity liabilities to entities of Sixth Street and Clive Cowdery’s Resolution Life.

allianz-logoIt’s one of the largest legacy or back-book life and annuity reinsurance transactions ever seen and for Allianz it’s all about freeing capital and adding efficiency, while for the counterparties it is a way to put capital to work in securing significant liabilities to manage.

Allianz Life revealed a reinsurance agreement with affiliates of Sixth Street, including Talcott Resolution Life Insurance Company, and Resolution Life, the specialist legacy life insurance investments arm of insurance entrepreneur Clive Cowdery’s Resolution Group, to cover a $35-billion fixed index annuity portfolio.

Allianz explained that the deal will “unlock value in its life insurance business by managing capital on its balance sheet more efficiently and increasing synergies with its asset management business.”

Allianz also said that, “The transaction illustrates the ability of Sixth Street’s insurance platform, which includes Talcott Resolution, and Resolution Re’s insurance group, Resolution Life, to create and execute highly flexible capital solutions for leading insurance companies at scale.”

The deal will unlock $4.1 billion in value and free up regulatory capital for Allianz, the re/insurer said, while Allianz Life’s return on equity should improve by around 6 percentage-points to approximately 18% and at a group level, Allianz’s Solvency II ratio is expected to improve by about 9 percentage-points to 216%.

It’s the largest life back book deal Allianz has entered into and the company said it, “is in line with the group’s expanded strategy to leverage partnerships with strong reinsurance and risk management companies to monetize the value of in-force business and enhance the protection afforded to customers.”

Allianz Life will continue to manage the policy administration for the portfolio, so with no changes to how policyholders are serviced, while Allianz’s giant asset management arm PIMCO and Allianz Global Investors will also stay on as the primary asset managers of the reinsured business.

But the liabilities are transferred effectively through this deal, with two significant investors and specialists in the life space now set to benefit from this arrangement.

Sixth Street is a large asset manager and acquired Talcott Resolution, a specialist at providing in-force and new business solutions focused on capital flexibility and risk management efficiencies to the insurance and reinsurance industry.

Once this Allianz deal is closed, Talcott Resolution and its affiliates will manage $111 billion in liabilities and surplus on a pro-forma basis.

Meanwhile, Resolution Life is the specialist legacy life focused investment vehicle and manager and part of Clive Cowdery’s Resolution Group.

Resolution Life takes on large books of life insurance business, using acquisitions or reinsurance backed by capital structures supported by institutional investors, channelling returns and profits back to them in the form of dividends.

After this transaction, Resolution Life will have invested approximately $5 billion of equity and have gathered $90 billion in assets under management.

As we explained earlier this year, Resolution Life raised $1.6 billion to fund growth through the acquisition and reinsurance of life insurance portfolios, using its Bermudian reinsurance platform Resolution Re, as well as platforms in the US and Australiasia.

At the time of that capital raise, which we covered in May 2021, Resolution Life was managing around $60 billion of assets globally on behalf of approximately 2.5 million policyholders.

Sir Clive Cowdery, Resolution Founder and Executive Chairman of Resolution Life, commented on this new arrangement, “This reinsurance agreement further illustrates Resolution Life’s ability to complete large, innovative, and complex transactions alongside constructive partners. Resolution Life’s focus has always been to provide stability and security for policyholders while helping global insurance partners with their restructuring plans.”

So this new deal and others Resolution Life has entered into through the second half of 2021, which include a transaction with Allianz Suisse Life to reinsure $4.3 billion of liabilities in September, Resolution has grown its platform significantly thanks to the additional firepower from its institutional investor base.

Which is why we find these legacy life deals interesting, as they feature capital markets backed capacity being used for reinsurance of back books, with fund structures underpinning the arrangements and investors often paid via dividends.

It’s not insurance-linked securities (ILS), although it does seem securitization could provide an alternative solution to some of these arrangements. But it is a form of insurance-linked investment in the eyes of the institutional backers.

Allianz also held its investor day today and announced a renewed focus on improving capital efficiency and lowering volatility, by reducing the long-tail risks in its portfolio, which of course this transaction is part of.

This is likely to be a trend for some of the bigger global players, that find the weight of back books dragging on their capital and have a lot to gain by freeing some of that with the help of reinsurance, suggesting a perhaps growing role for capital market investors to finance legacy arrangements and perhaps more opportunity for the ILS market as well.

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