IN 2016, MARKET CONDITIONS AND REGULATORY CHANGES LED MANY INSURERS TO REVIEW BOTH IN-FORCE PERFORMANCE AND NEW BUSINESS RETURNS TO IMPROVE CAPITAL EFFICIENCY AND REALLOCATE RESOURCES TO MORE PROFITABLE BUSINESS SEGMENTS. RGA PARTNERED WITH CLIENTS TO EXECUTE STRUCTURED TRANSACTIONS, EXPLORE CLOSED-BLOCK ACQUISITIONS, AND IDENTIFY NEW OPPORTUNITIES FOR GROWTH OR IMPROVED RETURNS.
From left, from Global Financial Solutions: Quentin Marsh, Vice President, Business Development; Michael Frings, Vice President and Senior Actuary, Pricing.
Ability to Execute Drives Success in GFS Business
RGA’s Global Financial Solutions (GFS) business line leverages market knowledge and analytical, investment, and riskmanagement expertise to bring innovative structures to market. With insurers facing increased regulatory and economic pressures, GFS focuses on providing long-term value to clients by collaborating to create mutually beneficial solutions. GFS business, including capital-motivated, asset-intensive, and longevity reinsurance products, generated pre-tax income of $433 million in 2016.
For more than 30 years, RGA’s reliable, flexible approach to capital-motivated reinsurance has set the industry standard. By helping companies de-risk and optimize their businesses, RGA equips insurers to offer more competitive pricing, develop new products, meet solvency requirements, and achieve return targets. In 2016, this included RGA’s first GFS transaction in mainland China as RGA strengthened its commitment to expand the presence of its financial solutions teams in markets across Asia.
In the U.S., GFS completed an innovative transaction with a leading insurer to provide reserve financing for a block of term life insurance. Under AG 481, primary assets are required to be held in support of a captive reinsurance agreement. By applying familiarity with the AG 48 framework and considerable expertise in financing alternatives, the RGA team was able to provide these primary assets using an affiliate of RGA, rather than through the direct insurer – making it the first transaction of its kind.
Difficult economic conditions, driven by low or even negative interest rates, led insurers to seek relief from investment-related risks in 2016. RGA helped mitigate this exposure through asset-intensive reinsurance. Primarily structured as full coinsurance with asset transfer, these solutions provide full-risk coverage for investment-related products, including fixed and variable annuities, payout annuities, and interest-sensitive products such as universal life and corporate-owned or bank-owned life insurance. Extensive investment expertise, risk capacity, and analytic capabilities – combined with a stable, well-diversified balance sheet – have made RGA an industry leader in this area: Asset-intensive products insured by RGA totaled more than $19 billion at the end of 2016.
The prospect of lengthening lifespans, particularly in a low interest rate environment, once again led insurers to seek longevity reinsurance support for products offered to pension plans and individual annuitants. RGA balances this business with its mortality protection business, thereby offering capital and risk-effective solutions for this long-term risk. GFS’s range of capabilities includes longevity swaps and full coinsurance of longevity and investment risk, including solutions focused on supporting the underwritten annuity market.
RGA grew the notional amount of its stable value wrap portfolio to $8.8 billion as of December 31, 2016 – a 24% increase over the previous year. RGA entered the stable value business in 2012, and has continued to selectively increase the number of provider partners and plan participants covered. Over time, the stable value team has expanded its base 401(k) coverage to also serve other defined contribution markets, such as 529 plans. In 2016, the business benefited from significant inflows into the stable value option across multiple defined contribution markets.
From left, from Global Financial Solutions, Asia Pacific: Michael Thomas, Executive Director, Business Development; Gaston Nossiter, Senior Vice President; Ken Su, Executive Director, Business Development.
Discipline in Acquisitions Brings Steady Growth
In recent years, growing risk mitigation and capital efficiency demands have compelled many insurers to consider exiting a block or line of business. RGA’s Global Acquisitions (GA) team supports clients with customized approaches for divesting runoff blocks. GA professionals leverage RGA’s global platform, as well as expertise in structuring, investments, and risk assessment, to deliver strategic divestiture solutions for clients. In some cases, this can include RGA assuming direct policy administration responsibility following an acquisition.
In an industry environment of continued disruption and uncertainty, RGA remained selective in the risks it assumed in 2016. The GA team pursued its work prudently, evaluating runoff and closed blocks as they became available and remaining prepared to invest when attractive opportunities arose. Potential acquisitions were assessed based on their fit within RGA’s risk profile, capacity, and market position. Despite heavy negotiation activity across the market, very few deals were transacted industry-wide. This included RGA, where no major acquisitions were finalized in 2016. The breadth of GA operations in markets it serves allowed for this disciplined strategic approach.
Gary Finkelstein, Senior Vice President, Global Acquisitions Europe.
RGA has deployed more than $1.2 billion into runoff blocks in the last five years, to the benefit of both RGA and its clients. Assuming in-force blocks complements other client-focused efforts, such as helping clients enter new markets and new lines of business through capital and risk support. Continuing economic and regulatory pressures are expected to generate additional opportunities for block acquisitions, and RGA is well-positioned to capitalize on these market trends while providing meaningful value to clients.
RGA’s in-force optimization team also enjoyed a successful 2016. A focus on consistency in analytics and in-force management throughout the year created opportunities to enhance capital efficiency, improve risk-adjusted performance, and foster organizational growth. As RGA grows in size and complexity, in-force optimization will remain a vital component of its global enterprise strategy.
(1) Actuarial Guideline 48 (AG 48), adopted by the National Association of Insurance Commissioners (NAIC), defines rules to be followed for life reserve financing transactions completed after January 1, 2015.