U.S. Life Insurers Use Reinsurance to Reduce Long-Term Care Insurance Risk

The U.S. life insurance industry saw a 13% increase in pretax operating income in 2024, driven by higher interest rates and strong investment returns, despite a slight decline in interest margins, according to Fitch Ratings. Beinsure Media has selected the most important points from the report.

The average operating return on equity (ROE) improved to 13.8% from 12.2% in 2023, with net income rising by 50% to $29 bn.

The commercial real estate sector remains pressured, particularly in office-related exposures, with expected gradual and manageable losses.

Key Highlights

• Pretax operating income rose 13% in 2024, driven by higher interest rates and strong investment returns.
• Net income surged 50% to $29 bn, with operating return on equity (ROE) improving to 13.8% from 12.2% in 2023.
• Annuity sales reached an all-time high of $432 bn, with growth in fixed indexed and variable annuities.
• Individual life insurance premiums are set to hit $16 bn in 2024 and continue growing.
• Term life sales rebounded after a 5% drop in 2022, with 2024 premiums expected to remain stable before growing 1% to 5% in 2025.
• Insurers are offloading long-term care (LTC) liabilities through reinsurance to improve balance sheets and capital efficiency.
• LTC remains a challenging sector due to unfavorable morbidity trends and regulatory complexities.
• Insurers are expected to continue divesting high-risk liabilities such as LTC, variable annuities, and universal life with secondary guarantees.

Rising interest rates are expected to continue to reduce investment maintenance reserve (IMR) balances for largest U.S. life insurers.

However, stable investment portfolios, strong liquidity and effective asset-liability management will mitigate the negative effects on statutory capital and cash flows.

U.S. Life Insurance Premium and Annuity Sales

Annuity sales hit a record $432 bn, with significant growth in fixed indexed and variable annuities. Fitch forecasts a decrease in the U.S. 10-year treasury rate to 4.2% by the end of 2025.

U.S. individual life insurance premium is on track to reach a record $16 bn in 2024 and continue growing in the current year, as the market continues riding a bounce first seen during the COVID-19 pandemic, according to LIMRA Report.

Market conditions are very favorable for the individual life insurance market. In 2024, we expect total premium to be level with or above the record set in 2023 (up 1% to 5%).

After dropping 5% in 2022, term life sales rebounded the following years driven by digital platform expansions and competitive pricing. Premium will remain level in 2024 and grow 1% to 5% in the full year 2025.

U.S. life insurers have used reinsurance to reduce exposure to LTC insurance

U.S. life insurers have used reinsurance to reduce exposure to long-term care (LTC) insurance, which Fitch Ratings sees as credit-positive.

These transactions strengthen balance sheets, improve capital efficiency, and enhance reserve adequacy and profitability.

LTC transactions are expected to be limited in 2025. However, higher interest rates have reduced bid/ask spreads, and recent deals have set a precedent for future transactions.

Fitch expects insurers to continue bundling LTC with shorter-duration, more profitable liabilities in reinsurance deals to reduce legacy risks and free capital for higher-return businesses.

• Unum Group (UNM) announced a $3.4 bn reinsurance deal with Fortitude Re, covering 19% of its LTC block. Fortitude Re will retrocede 100% of the biometric risk to a global reinsurer. This full-risk transfer should strengthen UNM’s balance sheet, reduce earnings volatility, and improve earnings quality. The deal is expected to generate a $100 mn capital benefit for UNM, with proceeds from individual disability offsetting some of the LTC capital impact.
• Manulife has taken similar steps to reduce long-duration business with low returns. In November 2024, it announced a $5.4 bn deal with Reinsurance Group of America (RGA), which included $2.4 bn in LTC reserves and a legacy block of U.S. structured settlements. This followed a December 2023 deal transferring $6 bn of LTC reserves to Global Atlantic, which then retroceded 100% of the biometric risk to a global reinsurer. These transactions reduced Manulife’s LTC reserves by 18% and morbidity sensitivity by 17%. Investment risk should decline as Manulife reallocates long-duration assets.

LTC insurers have faced challenges due to unfavorable morbidity

LTC insurers have faced challenges due to unfavorable morbidity, persistency, and interest rate trends. State regulations complicate the situation, as approval of annual rate increases varies by jurisdiction. Different asset adequacy testing standards across states further add to uncertainty.

Fitch expects more reinsurance deals as insurers divest businesses that generate returns below their cost of capital.

Some transactions will require reserve strengthening or payments to assuming reinsurers to account for uncertainty. Many original underwriting and pricing assumptions—especially before the early 2000s—were overly optimistic.

Risk varies by life insurance policy vintage, insured age, and contract features

For some blocks, data on older age morbidity is still developing, creating additional uncertainty. Some insurers assume morbidity improvement in asset adequacy testing, which Fitch views as an aggressive assumption.

Given the underperformance of LTC relative to pricing, insurers are likely to continue organic de-risking efforts, including benefit buy-downs and rate increases.

Recent LTC transactions have included negative ceding commissions, reflecting the high risk of these liabilities. LTC exposure increases earnings volatility, raises reserve and statutory capital needs, and heightens sensitivity to interest rate fluctuations.

While rising rates have provided some relief, LTC’s long duration leaves it exposed to future rate volatility. Insurers have partially hedged against this risk by locking in higher rates.

Fitch expects insurers to keep offloading long-duration and market-sensitive liabilities, such as LTC, variable annuities, and universal life with secondary guarantees.

Insurers will focus on capital efficiency, while acquirers will seek to enhance investment returns.

U.S. life insurers have nearly doubled their ceded reserves

Regulatory bodies, including the NAIC in the United States and the Bermuda Monetary Authority, have introduced reforms to enhance transparency and align with the industry’s rapid growth.

U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 bn to $1.3 tr in 2023 and during the same period, reserves ceded to offshore jurisdictions have nearly quadrupled, exceeding $450 bn.

The pursuit of higher yields, combined with long-duration and illiquid liabilities, has fueled acquisitions and partnerships between life insurers and alternative investment managers. Fitch expects this trend to continue in 2025.

Increasing exposure to less-liquid private assets with complex structures, such as CLOs, can heighten investment and asset risk. This factor is considered in Fitch’s evaluation of the Investment and Asset Risk key rating driver.

US life insurers’ offshore reinsurance

U.S. life insurers’ utilization of offshore reinsurance and sidecars, including through partnerships with alternative investment managers (Alt IMs), will continue to grow, Fitch Ratings says.

Offshore reinsurance allows insurers to optimize their capital, with access to increased scale and new business volumes.

However, we have a cautious view on utilization of offshore affiliated reinsurance that drives unsustainable growth, or third-party reinsurance that elevates counterparty risk.

We expect an increased volume of offshore reinsurance vehicles, given investor appetite for the segmented risk, fee-based income, and capital optimization for the insurer.

U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 bn to $1.3 tr in 2023. During the same period, reserves ceded to offshore jurisdictions nearly quadrupled, exceeding $450 bn.

Most offshore reserves will be ceded to Bermuda, but life insurers may migrate to other regimes with enhanced regulatory flexibility on the margin, such as Cayman. However, we view arbitrage unfavorably and endeavor to assess capital consistently in our proprietary Prism capital model.

Bermuda represents approximately 80% of offshore reinsurance by reserves

We expect the country’s market share to continue over the long-term despite its adoption of a corporate income tax and implementation of more stringent regulatory requirements.

Offshore reinsurance vehicles, including sidecars and platforms, aim to optimize capital for the insurer and enhance fee income for both the insurer and the Alt IM partner.

Reinsurance platforms typically start with cessions from their sponsor and gradually incorporate third-party business, whereas sidecars assume all their business from the sponsoring insurer while raising capital from third-party investors.

However, sidecars can introduce counterparty credit risk and potential regulatory scrutiny, which could negatively affect an insurer’s financial stability if the vehicle underperforms.

Life and annuity offshore sidecars

Date	Sponsor	Reinsurance Sidecar
Dec-24	MetLife/General Atlantic	Chariot Re
Dec-24	Allianz	Sconset Re
May-24	Third Point LLC	Malibu Life Reinsurance SPC
Dec-23	RGA/Golub Capital	Ruby Re
Sep-23	Athene / Apollo	ACRA 2
Sep-23	Prudential / Warburg Pincus	Prismic Life Re
Jul-23	Global Atlantic / KKR	Ivy Re II
Jan-23	Kuvare/Davidson Kempner	Kindley Re
Jan-22	American Equity Investment Life HoldCo.	AEL Bermuda Re
Jan-22	Massachusetts Mutual, Centerbridge Partners	Martello Re
2021	Security Benefit / Eldridge	SkyRidge Re
Apr-20	Global Atlantic / KKR	Ivy Re
2019	Athene / Apollo	ACRA
Jan-14	SCOR	Atlas Reinsurance X

Offshore structures can increase compliance costs

Offshore structures can also increase compliance costs while raising operational complexities, which could pressure profitability and investment returns.

Recent block transactions involving reinsurers with Alt IM tie-ups and publicly traded cedants have been largely neutral to ratings, as cedants often experience an improved business risk profile, which is offset by reduced diversification.

Offshore reinsurance volumes have been supported by record levels of fixed-rate and fixed-indexed annuity sales, which have created a need to optimize capital, including through flow reinsurance.

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AUTHORS: Jamie Tucker – CPA, CFA, Senior Director, Life Insurance Fitch Ratings, Laura Kaster – CFA, Senior Director, Fitch Wire (North and South American Financial Institutions)