European pension and life consolidator Phoenix Group is the latest company focused on this space to consider leveraging investor appetite for insurance-linked returns to bring third-party capital into its business to augment its ability to write more bulk purchase annuity business.
Phoenix Group had reported a jump in retirement related premiums to £3.2 billion for the first-half of the year and during its half-year earnings call, executives explained that they see an opportunity to harness third-party capital to build on this success.
Phoenix had recently established a Bermuda based entity, Phoenix Re, as it sought to consolidate and add efficiency to its activities in the life and annuity reinsurance space.
Andy Briggs, Group Chief Executive Officer at Phoenix Group commented on the retirement and bulk purchase annuity business, “This market is large and growing, ever more strongly, due to higher interest rates. Our participation is consciously disciplined, to limit our exposure to credit risk, and maintain our balanced business mix. We therefore continue to take a selective approach to deals, focused on value over volume.”
He went on to say that, “Given the size and attractiveness of the BPA market, we are exploring innovative ways of leveraging our expertise to participate in a capital efficient way, through our recently established Bermudan entity, Phoenix Re.”
Adding that, “Our initial focus is on proving our capital efficiency through internal reinsurance,” and saying “Future plans could see us leverage third party capital, in time.”
Recall that a number of life and annuity reinsurance specialists are now leveraging investor capital within third-party capitalised sidecar structures, with Athene Holding Ltd., the life and retirement reinsurance company majority owned by investor and private equity specialist Apollo Global, perhaps the biggest proponent of this strategy.
Since Apollo and Athene ventured into the reinsurance sidecar space, others to join them include KKR’s Global Atlantic with its Ivy co-investment sidecar vehicle, Kuvare Holdings which established Kindley Re as a sidecar-like structure, SkyRidge Re sponsored by Security Benefit and Eldridge, amongst other ventures of this kind.
The attraction is to leverage investor appetite to participate in the returns of this type of life and annuity reinsurance business, using third-party capitalised structures akin to a sidecar to provide firepower for doing more and larger reinsurance deals.
Which appears to align with the strategy at Phoenix Group.
Rakesh Thakrar, Group Chief Financial Officer, explained, “On the BPA (bulk purchase annuity) more efficient capital way, so this is reflecting what we’re doing by setting up this Bermudan reinsurer.
“We’ve just started on this, so this is very very early days, but the intention here is potentially to look at generating more value internally from the annuities that we have within the Group currently that are not necessarily getting the best return, and this is outside of the UK currently and then we would look to access, if we can, the third-party capital.”
Thakrar said that “what this will enable us to do is essentially bring that capital to the UK”, adding, “What it will mean is that, you know, we’ll be able to do more deals, but what it won’t mean that we’ll be spending any more of our own money.
“We’re still disciplined in our own £300m, but essentially, we’re facilitating additional deals by the use of getting more capital in, and we’ll be able to also be earning fees from that in a capital light way, which is essentially what we’re trying to, you know, will help us in our strategy.”
While not an insurance-linked investment in the typical ILS securities form, these arrangements are attractive to large investors looking to benefit from the returns that can be generated, as well as the effects of investment float that can come with these large bulk annuity reinsurance deals.