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Hot topics in the U.S. life insurance market

(Re)thinking Insurance Podcast: Season 3 – Episode 4

April 18, 2023

In this episode, Nik Godon, Karen Grote and Nick Komissarov provide insights on managing in-force blocks, M&A deals and the pension risk transfer market.
Insurance Consulting and Technology|Retirement|Investments
Insurer Solutions

In this episode of (Re)thinking Insurance, Carrie Kelley is joined by Nik Godon, Karen Grote and Nick Komissarov to explore hot topics in the U.S. life insurance industry. They discuss perspectives on managing in-force blocks, M&A transactions and the pension risk transfer (PRT) market.

What may happen is that some serial acquirers of the past will focus on new business opportunities and explore new markets, such as registered index-linked annuity, which has grown tremendously lately.”

Nick Komissarov | Senior Director, Insurance Consulting and Technology

Episode 4: Hot topics in life insurance

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About our host

Carrie Kelley

Carrie, who is a Director in the Insurance Consulting and Technology business, joined WTW in 2012 and is based the Atlanta office. Her primary areas of practice are individual life insurance, COLI/BOLI products and principles-based reserving. She has assisted clients across a range of M&A, reserving, and financial modeling issues.


(Re)thinking Insurance - Episode 4: Hot topics in life insurance

KAREN GROTE: Really all signs point to an expected strong 2023 PRT market. Now whether it can top 2022, that remains to be seen.

NARRATOR: You're listening to (Re)thinking Insurance, a podcast series from WTW where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance

CARRIE KELLEY: Hello, and welcome to (Re)thinking Insurance. I'm your host, Carrie Kelley. On today's podcast, we will be discussing the hot topics for the life insurance industry in 2023. On today's podcast, we have three guests who will be covering different areas of focus. First, we'll have Nik Godon, a director at WTW, to provide thoughts on managing your in-force block. Welcome, Nik.

NIK GODON: Glad to be here. Thanks for having me, Carrie.

CARRIE KELLEY: Thank you for being here. Then we'll have another Nick, Nick Komissarov, a senior director at WTW, who will be discussing the M&A market for 2023. Welcome, other Nick.


CARRIE KELLEY: All right. And finally, we have Karen Grote, a senior director at WTW, who will wrap us up with her view on the pension risk transfer or PRT market for the year ahead. Welcome, Karen.

KAREN GROTE: Hi, Carrie. Thanks for having me.

CARRIE KELLEY: All right. I'm happy to have you all on the show. So as I mentioned, we will be starting with Nik Godon. Nik helps lead our thought leadership around in-force management and specifically, UL optimization. Nik, before we dive into your topic we'd like to learn a little bit more about our guests when they come on the podcast by asking what's something you like to do outside of work.

NIK GODON: Sure. Well, given at work, I say I have to use my mind a lot, and it's very serious, I typically try and dumb things down, I'll say, on my off time. So I read a lot. I'll say watch a lot of movies and TV. But I'll say my one expensive habit is LEGO. And so I have I'll say an extensive LEGO collection, in particular, Star Wars. Fits right in with my nerdy, I'll say, self. And basically, every few months, when my wife allows me to, purchase another large set to play with.

CARRIE KELLEY: Nice. Very cool. Do you have-- what's Han Solo's ship? The Millennium Falcon?

NIK GODON: I do, but I only have the cheap one. There's an $800 one out there that so far, I haven't had the privilege of purchasing.

CARRIE KELLEY: You've not convinced your wife on that one.

NIK GODON: No. Not yet.

CARRIE KELLEY: Good luck. Maybe one day. So then, let's talk about UL optimization. So there have been some recent large US GAAP unlocking impacts from a couple of large life insurance companies. Can you talk about what caused those impacts?

NIK GODON: Sure. So in 2022, both in the second quarter and the third quarter, we saw two large life insurers update their policyholder behavior assumptions on universal life with secondary guarantees. So I'm going to use the acronym ULSG when I'm talking to that. But basically, companies have continued to see strong persistency on these blocks. Basically, policies sticking around longer than what they've expected.

And as a result for these two companies, but I think generally from the industry perspective, they needed to update their assumptions, and that resulted in essentially large increases in their liabilities. So what they think they need for benefits in the future.

CARRIE KELLEY: And so, is this a common occurrence?

NIK GODON: So I'll say the magnitude of the adjustments that we saw from these two insurers was certainly very large. But updating of assumptions is potentially an annual exercise. So typically under GAAP, US GAAP, companies review their assumptions at least once a year. And in particular, on UL, many life insurance companies who sold a lot of business in the '90s and 2000s have seen underperformance of those blocks.

And part of that being because they've had to update their assumptions, like persistency. But it's also been driven by other things beyond policyholder behavior. So as an example, interest rates have come down significantly from the '80s and '90s until recently, but they're still very low relative to those periods. And that has also generally caused the need for insurance companies to increase their liabilities, as well as make changes to their asset liability management practices.

CARRIE KELLEY: So is there anything the insurance companies can do to address the underperformance on their universal life blocks?

NIK GODON: There certainly is. There's a variety of options out there. So I mentioned the asset liability management or ALM option. So essentially, all companies have done something with their assets and their ALM to try and help mitigate the impact of lower interest rates. But generally, all of these UL products have what are called non-guaranteed elements or NGEs. And typically, within a contract, an insurance company has the ability to change those NGEs for various reasons, depending on what the contract language says.

So as an example, if a company is now experiencing worse mortality, persistency, and interest rates are lower, that will generally lead to worse performance or profitability than what they originally expected in their pricing. And that then potentially allows the company to say we need to adjust our non-guaranteed elements, and basically help compensate for that underperformance, and to try and get the overall profitability back up close to what pricing would have originally expected.

So those exercises certainly are, I'll say, comprehensive and difficult to do. There has been a lot of litigation in this area for companies that have taken action. So actuaries who do this type of work definitely have to be careful, talk to their lawyers, and follow guidance and actuarial standards of practice to help make these changes.

Now that's UL. Secondary guarantee UL. Generally changing non-guaranteed elements has a limited impact because of the presence of the secondary guarantee. So in the cases of these ULSG products, companies will look to other options to potentially take something or help improve the profitability on the ULSG product. And in some cases, some of those options are something that the company should also consider for their normal UL without secondary guarantees as well. So we've seen some companies taking, I'll say, a view on the expense side of things, trying to improve profitability. Are there ways that they can lower their expense to help compensate and improve things? And so we have partnered with some companies on outsourcing of actuarial as an example and our actuarial functions. That can help lower those expenses.

We've also seen, and Nick K. is going to talk about M&A in a second. We've also seen a lot of companies look to divesting of these blocks of business. So potentially selling a company with a large UL block that's underperforming or re-insuring that business to another company that's interested in acquiring it. So that's certainly been an active part of the M&A market recently.

And then some companies have actually looked at exchange programs. So policyholders' needs for life insurance may have changed from when they originally purchased the policy. So is there an option that they might be able to exchange that product for something that better suits their needs today? So those are all different options that we've talked to companies and assisted companies with and trying to figure out what are the best options to try and address these underperforming blocks.

CARRIE KELLEY: Now you mentioned insurance companies can change their non-guaranteed elements. Is there guidance on how to make these changes?

NIK GODON: Yes. There is. So I mentioned that briefly before. In particular, actuarial standard of practice number two. That's specifically focused on non-guaranteed elements and basically, what actuaries need to consider when, I'll say, both reviewing as well as changing those non-guaranteed elements. And that actually was updated in June of last year. And there were significant changes to that ASOP. So certainly something any actuary looking to possibly do work on the NGE side of things needs to basically take a look at ASOP two and make sure that they're basically following the guidance within there.

Certain states also have specific regulations in this area. So a particular example is New York with what is called Regulation 210. So that was actually released, became effective in March of 2018. And technically, it requires companies to review their NGEs at least once every five years. So an important thing to consider though is these things do provide guidance, but there's still a lot of judgment that goes into managing non-guaranteed elements.

And as I noted earlier, there has been a lot of litigation in this area for companies that have taken action. But there's actually also been a lot of litigation for companies that have not taken action. So

you basically need to consider both of those things and what has been happening from a litigation perspective. And there have been some large settlements out there, some north of $100 million on both, I'll say, companies that have taken action with their non-guaranteed elements, as well as companies that have not.

CARRIE KELLEY: Well, it definitely sounds like there's a lot of things to worry about on these universal life blocks. Any final advice or guidance that you can give companies?

NIK GODON: Sure. So there's definitely a lot to think about. But one thing in particular, assumptions is key to understanding both what has happened, as well as what you're thinking of or what the assumptions are for the future. And so we think companies should be regularly reviewing their own experience, as well as taking a look at industry studies that are produced.

So as an example, WTW periodically produces what we call our TOAMS study, which examines both mortality and lapse and surrender. And so we think it's very important for companies to look at their own experience, but also understand what is being seen in the industry because that may influence once again expert judgment, what do they think may happen for their business in the future.

WTW is actually also looking to do a more comprehensive UL behavior study in 2023 that we think will be very important from an industry perspective to understand. Once again, behavior, but also what's happened recently due to COVID because that has caused some significant changes in experience. And we think overall, optimization of these UL blocks, there's multiple ways to go about doing it. I mentioned several options.

The best option or the combination of best options for companies is going to vary depending on their circumstances and their preferences. So we think having expertise and assistance to do these types of things is certainly key, as I noted to do them as best as one can.

CARRIE KELLEY: Thank you, Nik. That was very informative. So Nik Godon mentioned divestment as one of the many options you would consider for your UL management of a block. Now we're going to move on to Nick Komissarov, our North American life M&A leader. Nick, I want to talk about the M&A market more broadly. So Nick, again, before we jump into the topic of M&A, what do you like to do outside of work?

NICK KOMISSAROV: So outside of work, actually, not very different from Nik G. I like doing LEGOs as well with my four-year-old daughter. The only problem becomes is that there are too many LEGOs around the house. They're like everywhere. And it's really hard to figure out which piece is from which one.

CARRIE KELLEY: I'm not missing the minefield if you step on them.

NICK KOMISSAROV: Oh, yeah. Exactly. Exactly. Got to wear slippers.

CARRIE KELLEY: All right. Well, very cool. OK. So starting with M&A, maybe we need to look back a little bit. So despite the COVID pandemic in 2021, we saw a large volume of M&A transactions in the life and annuity space in North America. Could you recap these and tell us how 2022 turned out?

NICK KOMISSAROV: Yeah. Absolutely. So 2021 was huge. I mean no one expected the amount of marquee deals that has happened. Just to name a few of them, Blackstone acquiring non-New York Allstate. Apollo acquiring all of Athene after spending it off. Brookfield acquiring American National. And Carlyle/Fortitude getting a block of VA business from Prudential, actually getting a legal entity. And for the most part, there was one theme. Asset managers were looking to acquire a block of long liabilities in order to expand the asset base that they had. The valuations that the asset managers provided to the insurers were quite advantageous because in 2021, insurers were looking for ways to manage the historically low interest rate environment, which is obviously not the case in 2023.

When we entered 2022, deal volume dried up significantly. So as you know, interest rates rose. Inflation rose. And we just had a few small deals. So I'll just list a couple of them here or actually most of the important ones. So National Guardian Life acquired Settlers Life. Then there was the somewhat controversial acquisition of Pavonia by Axar Capital. And then finally, Mutual of America's acquisition of Landmark Life. So that's a fairly small transaction.

What was interesting is that on the Bermuda front, an asset manager, Aquarion, was able to close the acquisition of Somerset Re, which is an interesting transaction and gets capital for Somerset to continue to execute reinsurance transactions, which they've done quite a few of those. But all in all, 2022, the volume was low, and there were no large transactions.

CARRIE KELLEY: So I think you hinted at it a little bit, but maybe we can dig a little bit more deeply into what do you think was the reason for the decrease in deal volume in 2022?

NICK KOMISSAROV: First, 2022 brought economic uncertainty. For quite a while in the insurance industry and finance industry, everyone was saying, oh, rates are going to go up. Rates are going to go up. And then the rates never went up. They just kept going down. And then we enter 2022, and everything just explodes. Inflation is up. Interest rates are increasing. Day to day, there are huge movements. So there's a lot of economic uncertainty from that.

So probably, insurance companies or the sellers took a bit of a pause to try to figure out how this environment affects them. So on one hand, blocks like long term care and secondary guarantee UL would get some help to the extent that they have a lot of excess re-investable cash flow that comes in from premiums. And they're able to reinvest this cash flow with higher rates.

On the other hand, fixed annuities are exposed to what's called disintermediation risk, where labs increase with interest rate rise, and policyholders actually lapse their policies or surrender their policies and get a new rate that's higher. But the insurers, in order to meet these obligations, have to sell assets at lower valuations. So definitely, rates had an impact on the decrease in deal volume. Second, I think the inventory of large insurers who were looking for PE or asset manager partner decreased because there were so many deals done in 2021. And then finally, thirdly, regulators started to look at these PE-backed insurers more. And looking at type of asset portfolios that they had and really dig into the yielder assets, where they would ask, where does the spread come from? Like is the asset really riskier, or is there something else?

And one of the things that we've seen is the actuarial guideline 53, which doesn't necessarily promulgate you to do anything different right now, but asks for sensitivity tests. So I think these were some of the reasons that 2022 had a lower deal volume.

CARRIE KELLEY: That makes sense, and a number of headwinds there. So with that background on 2021, 2022, what's your outlook for deals in 2023?

NICK KOMISSAROV: So in 2023, I think we'll see more of what we saw in 2022. I think it will be a tough market. Not only are the interest rates up, the yield curve is severely inverted, meaning that the short rates are higher than the long rates. So the expectation of rates is completely unclear, which brings a lot of uncertainty to deal pricing.

Also, asset portfolios used to have significant unrealized gains baked into them when the interest rates were low. And this was accretive to market value-based jurisdictions, like Bermuda, in pricing. So the buyers were able to offer up a better price. This is no longer the case. And most of the asset portfolios are sitting on unrealized losses. So that's definitely a headwind that's going to prevent the volume of deals from being large this year.

But that said, higher interest rates may unlock new possibilities. As Nick G. was saying, maybe a large block of secondary guarantee UL is going to transact or a large block of long term care because the reinvestment rates are so attractive now. Or maybe, and Karen is going to talk about this, pension risk transfer is going to continue to grow.

Finally, what may happen is that some serial acquirers of the past will focus on new business opportunities and explore new markets, such as registered index linked annuity, which has grown tremendously lately. That's my view. I think that 2023 will continue to see very low deal volumes. But you never know. A lot of uncertainty.

CARRIE KELLEY: OK. Well, thank you, Nick. I appreciate your perspectives. Now we will move to Karen Grote, who's going to talk about other facets of the market, specifically with insights into pension risk transfer or PRT for 2023. So first, Karen, what do you like to do outside of work?

KAREN GROTE: So this is a timely question because I've just recently picked up my paint brush again. I love painting. I almost majored in art. But after a long hiatus, dealing with two very young children, I'm finally getting at it again. So it's nice.

CARRIE KELLEY: So not LEGOs. Nice outlet.

KAREN GROTE: We have those too. I literally feel Nick's pain.

CARRIE KELLEY: Well, what are your expectations for the PRT market?

KAREN GROTE: Yeah. It was interesting listening to Nick's answer on the broader M&A market because the PRT market is going to be quite a different answer. So to answer this, we need to look at a few things. The first is the PRT market for the past two years. 2021 and 2022, have shown tremendous growth. And even just through the third quarter of 2022, it's clear that that will be a record year in terms of total billions of premiums transacted.

The second is the overall economic condition. So with interest rates up and continuing to increase, plan sponsors should be well positioned to complete a transfer as the higher interest rates mean lower present values and liabilities. And this is important because it boosts their funding ratios and then makes it less expensive to complete a transaction.

And then finally, we have to consider the supply from the plan sponsors, as well as the demand from the insurance companies taking on this business. And neither of those are showing anything but increased interest. So combining all of these, really all signs point to an expected strong 2023 party market. Now whether it can top 2022, that remains to be seen. There was a very, very large $16 billion deal. But overall the growth in the market is expected to continue.

CARRIE KELLEY: What items are top of mind for the insurers playing in the PRT market?

KAREN GROTE: Yeah. We do spend a lot of time speaking with them. And if I had to sum it up, I would say it's competitiveness and data. So PRT players are continuously looking for ways to improve their pricing. And a big part of that is refining their assumptions. A key area is the mortality assumption. So we have seen insurers looking externally as well as internally for data and experience that's relevant. In addition, they've also been getting more sophisticated in their analysis, and we've seen a real movement towards predictive analytics.

CARRIE KELLEY: OK. And how does reinsurance factor into PRT?

KAREN GROTE: We have seen some reinsurance transactions be completed, but it has been relatively limited. Typically, what we do see are flow deals, where there is some benefits to either pricing or the capacity of the direct righter. However, it is worth noting that we are seeing a ton of interest from reinsurers. I think I speak to one every month. But that has not yet been really matched by the interest of the direct righters, but I still remain sort of optimistic that we'll see some uptick in the future. And it's just one more interesting thing to watch as the US PRT continues to mature.

CARRIE KELLEY: It definitely sounds like you are pretty optimistic on continued growth of the PRT market in 2023. I guess, what is one key takeaway you would have for current players or those looking to enter the market in 2023?

KAREN GROTE: I would say it's really about continuously improving. So looking to improve assumptions. They have become more sophisticated. And look for ways to play in other parts of the market that maybe you aren't playing in just yet.

CARRIE KELLEY: That makes sense. All right. Well, thank you very much, Karen. And thank you to all of our guests today. So thank you, Nik Godon, Nick Komissarov, and Karen Grote for joining me today. And thank you everyone for listening to (Re)thinking Insurance.

NARRATOR: Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the insights section of

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