US life insurers’ growth in offshore reinsurance vehicles to persist

Written by Michael Griffiths

20/12/2024

The trend of US life insurers partnering with alternative investment managers (AIMs) via offshore sidecars and reinsurance platforms is set to persist, according to Fitch Ratings.

The credit rating agency suggested that tie-ups would continue to take other forms, including minority stakes, but added that it also expects an increased volume of offshore reinsurance vehicles, given investor appetite for the segmented risk, fee-based income, and capital optimization for the insurer.

Offshore reinsurance vehicles can provide additional risk capital, which can allow insurers to originate or acquire larger volumes of business while helping to manage their capital requirements more efficiently and potentially improve financial leverage.

The vehicles can also increase underwriting capacity and improve diversification by enabling insurers to share risks with investors, potentially reducing the overall risk exposure.

However, insurance groups may establish sidecars to drive above-average growth. These vehicles also introduce counterparty credit risk and potential regulatory scrutiny, which could negatively affect an insurer’s financial stability if the vehicle underperforms.

“Insurers typically form sidecars to partner with external capital sources or to establish a structure to accept capital from third-party investors,” Fitch said.

“While sidecars assume all of their business from the sponsoring insurer, reinsurance platforms originate through cessions from their sponsor, and are expected to assume third party business over time. Both types of offshore reinsurance vehicles are intended to optimise capital for the insurer, as well as increase fee income for the insurer and the AIM partner.

“Entities with sidecars within Fitch’s rated universe include Athene and Global Atlantic. To-date, the sidecars have largely performed in line with or exceeded initial return expectations and successfully deployed the capital, leading to subsequent iterations, which should persist.”

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