|[May 08, 2014]
Fitch: Re-emergence of VA Reinsurance Positive for US Insurers
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 (News - Alert) & 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
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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