Insurance Industry Corporate Governance Newsletter – Insurance Laws and Products

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To Our Clients and Friends,

The April edition of our Insurance Industry Corporate Governance
Newsletter focused on how the insurance industry and insurance
regulators are concentrating on unfair discrimination (including
proxy discrimination) in insurance underwriting and rating.

This month, we look at corporate separations and how they are
being used to alter the landscape in the life insurance and annuity
industry. These separations have wide-ranging implications for the
industry and have proven to be a critical aspect of delivering
shareholder value.

Business Separations in the Life Insurance and Annuity

The roots of corporate separations can be traced back to the
development of retirement and protection products with design
features intended to compete in an increasingly competitive market
for consumer financial assets. These products have proven in many
cases to require heavier amounts of capital than anticipated, due
to factors such as changing product regulation, the protracted low
interest rate environment, changing morbidity and mortality
assumptions, evolving accounting standards and, in some cases,
acquisitions of companies by non-U.S. owners subject to Solvency II
and IFRS regimes that are not well suited to these products.

The question on the table for companies that own these
businesses is: should we still own them, at least in their current
configuration, or is there possibly a better structural home for

The tool kit for addressing this question includes some or all
of the following elements:

  • Runoff and Product Design. A first step in managing a
    capital-heavy block may be to stop selling the product, or to
    redesign it in such a way as to mitigate the capital strain. This
    is often easier said than done, as regulatory constraints and the
    practical need to continue to make competitive products available
    for a distribution force to sell to consumers can limit corporate

  • Financing. Some products, for example level premium term life
    insurance and universal life with secondary guarantees, have proven
    susceptible to financing solutions. These financing structures are
    often dependent on the formation of a captive insurer and
    reinsuring the capital-heavy product features to that captive.
    While effective, these structures require intensive regulatory
    review, can be costly to establish, and in some cases depend on the
    availability of third-party financing sources, and so are
    unreliable as a complete solution.

  • Dispositions. Products that have been put in runoff, including
    in some cases those that have financing structures already in
    place, can be good candidates for sale, and in particular for a
    transfer from public company to private capital ownership. In the
    life and annuity industry, dispositions of this nature can be
    structured as either reinsurance or a sale of a legal entity. The
    reinsurance structure raises issues of counterparty credit and thus
    can be more difficult to explain to investors and analysts than a
    legal entity sale. In our experience, though, so many large
    reinsurance dispositions have been completed at this point that
    investors and analysts most likely understand the nature of
    recapture risk, which can be heavily negotiated in the deal

  • Sidecars. Many companies are looking at ways to lighten the
    load of capital requirements by establishing sidecar entities,
    often in non-U.S. jurisdictions, funded with third-party capital,
    sometimes in a partnership with a private equity firm. These
    vehicles can be used to assume business either on a runoff or
    future flow basis, and benefit the ceding company by transferring
    the business to an entity formed in a jurisdiction without the same
    capital-intensive requirements and where the assuming company is an
    affiliate of the ceding company, thus removing some of the
    counterparty risk inherent in other reinsurance dispositions. The
    transfer alleviates capital strain on the ceding company, allowing
    the ceding company to continue to write new business and redeploy
    capital into other areas. For more detail on the increasing
    prominence of sidecars in the life and annuity sector, join our
    webinar here. 

  • Spin-offs and Partial IPOs. Some companies have gone a step
    farther and isolated capital-heavy business into a SpinCo entity
    that can then be carved out and distributed to existing
    shareholders or into a vehicle that can be sold to investors in an
    IPO, typically with subsequent secondary sales. For example,
    MetLife, Inc. and Prudential plc used spin-offs in recent years to
    exit the U.S. life and annuity sector, AXA S.A. sold its U.S. life
    business in an IPO and more recently, AIG, Inc. filed for an IPO of
    its life and retirement business. While a spin-off or IPO has the
    benefit of allowing for a relatively clean exit from a
    capital-heavy business, such transactions are not without execution
    risk. Regulatory approvals will almost certainly be required in
    connection with internal restructurings to transfer business
    (including entities, personnel and contracts) to a SpinCo or IPO
    vehicle, to disentangle and prop up standalone operations and to
    dispose of a controlling interest in an insurer or, where
    applicable, approve a new control person. Insurance regulators may
    require additional capital contributions be made to the insurance
    companies once those companies no longer have the implicit support
    of the distributing or selling parent, making a spin-off or IPO
    potentially expensive. Further, a spin-off or IPO can be a lengthy
    process and, in the case of an IPO, ultimate timing may be subject
    to market conditions outside of a company’s control.

While the deal structures described above are quite divergent in
terms of the amount of risk transfer, counterparty risk, regulatory
issues, execution risk and other key factors, they all share a
focus on balancing the need to write competitive products and grow
business organically with the imperative to manage capital
efficiently and ensure companies have the resources needed to make
investments in technology, people and other forward-looking aspects
of their business.

What Companies Should Do Now

The issue of efficient capital management is common to every
company operating in the insurance sector. The better that
companies can strike a balance between organic growth and efficient
management of capital, the more likely they are to be able to
decrease their cost of capital and continue to compete effectively
without undergoing major structural change.

With that in mind, we are hopeful that the framework described
above can be a useful tool for boards and the senior management of
life insurance and annuity companies as they think about the
options for managing capital-intensive businesses.


At the core of corporate governance for life insurance and
annuity companies lie many questions about the most efficient
allocation of capital resources – e.g., how to build a
company that looks to the future but also appropriately manages its
legacy liabilities. The business separation structures described in
this newsletter are intended to help companies develop a framework
for thinking about these issues and to understand the tools
available as they undertake that critical exercise.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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