Large global reinsurance firms remain focused on buying up closed blocks or books of life and health insurance business, believing that by pooling the underlying assets and managing the legacy claims they can make the books perform better than those who wrote the business.
It’s a business that also attracts a variety of investors and also some third-party capital, as acquiring assets from life portfolios and hoping to be able to outperform the originators can be profitable for asset managers as well as reinsurance firms.
Swiss Re continues to focus on this business, particularly in the UK with its Admin Re unit. While German reinsurance firm Hannover Re is also engaged in these closed book life portfolio buyouts, through its interest in Life Invest Holding AG.
In fact, Life Invest Holding AG has completed its latest transaction just today, buying the closed life business of Skandia Switzerland from its owner Old Mutual Wealth.
Life Invest Holding AG is owned by Hannover Re and German property development focused conglomerate the Mutschler Group, a family owned organisation. The Mutschler group’s interest is further evidence that the cash flows and assets available from insurance business are attractive as a float, investment and asset management play.
Skandia Switzerland had 1.3 billion Swiss francs of assets under management at the end of 2014 and made a 25 million CHF profit last year.
Life Invest Holding AG will be hoping to better manage the closed book of business, through more efficient claims processes and by pooling the assets with others in order to make a better return over the life of the portfolio.
Hannover Re has also been involved in another Skandia related deal, through its interest in Heidelberger Lebensversicherung AG a firm owned by private equity investor Cinven and the German reinsurer. They bought out Old Mutual’s Skandia units from Austria and Germany last year, which gave them EUR4.9 billion of assets.
This business remains an attractive one and also one with potential due to Solvency II, which could push some life insurers to offload old books of business.
There may be opportunities for new entrants, third-party investors and new asset manager backed business models in this area as well, especially given the large pools of assets that can be acquired. Swiss Re has sought third-party capital to back its Admin Re vehicle in the past and large investors like Athene and Apollo continue to demonstrate the attraction to life portfolio type business.
Swiss Re recently told Bloomberg that the opportunities for buying up closed books of life and health insurance business have never been better, particularly due to insurers struggle with regulations and low-interest rates.
Regulations mean that it’s sometimes preferable to offload or transfer risks along with the assets they are connected with, while low-interest rates makes it harder to generate the return required to service the portfolios of business over the longer term. Hence asset managers may increasingly be attracted to this space.
“Right now, it’s almost a perfect storm of opportunities for our market,” Bob Ratcliffe CEO of Admin Re told Bloomberg in an interview.
As opportunities to buy up closed books of life business continue to grow in number, it is possible that new companies may emerge allowing third-party or even ILS type investors to participate.
It might be possible for a new partnership with asset managers to allow ILS investors to finance and take on the mortality, lapse and any longevity risks, while the asset manager could invest the portfolios assets.
Being closed books, that need to be run-down, this might be more attractive to third-party capital as there is a limit to the lifespan of the portfolios. It may also be possible to structure something allowing ILS to just take the tail risk with a defined duration, perhaps even involving securitisation.
It’s an interesting area at the intersection of reinsurance and investment, where the capital markets show great interest in getting involved, be that direct investors, private equity, hedge funds or ILS specialists. It could be a sector to watch for opportunities, especially as regulatory and capital demands on smaller life insurers grow.