Competing for assets

For life insurance companies, higher interest rates are a strong incentive to acquire assets. After the years of low rates incentivised listed insurers to divest assets, often to private equity investors, today's environment enables strong, profitable balance sheet growth. We expect 40% growth in industry investment income in key markets by 2027. Competition is intense: asset management capabilities developed in the low yield years are a key differentiator, and fostering product innovation beyond traditional life offerings. 

• Structurally higher interest rates lift the outlook for profitability, competition and core offerings for life insurers.
• We forecast a 40% rise in insurers' investment income in the eight largest life markets in the five years to 2027.
• Competition for assets between listed and private equity-owned insurers is intensifying as business models increasingly converge.
• Asset management capability will be the first differentiator in the race to acquire new assets.
• Attractive and competitive product offerings will be the second differentiator.

Today's "higher for longer" interest rate environment is boosting life insurance demand and new business sales, investment performance and profitability. We forecast a 40% rise in investment income, on average, for insurers in the largest eight life markets in the five years to 2027, driven primarily by higher bond yields.¹ With higher rates today, competition between insurance companies to acquire and grow their assets, either through new business sales or acquiring blocks of assets from sectors such as pensions, is intense. Investment capabilities and core offerings will likely determine who gets ahead. If competition remains rational, it should benefit consumers who should receive more attractive crediting rates and diverse new offerings.

Life insurers are returning to asset-intensive business now after struggling to generate positive returns during the low interest rate years. The return margins on traditional life insurance products with fixed guarantees are more sensitive to interest rates, and insurers can benefit from holding more of these assets now that rates are higher. Under low interest rates, listed insurers faced unfavourable public market valuations for traditional business, with lower multiples awarded to spread-based income than on fee-based income, such as from "capital light" products such as unit-linked offerings. As a result, listed insurers pivoted to capital-light business and divested legacy books of traditional assets, often to private equity firms. We estimate private equity-owned insurers own roughly 25% of US individual annuity liabilities today.

Today, insurance companies are tapping a new supply of portfolio-level deals and bulk annuities from corporates and pension funds seeking to de-risk liabilities. In the UK, improved funding levels in defined benefit pension schemes have activated record new buyouts by the life industry. These totalled GBP 49bn in 2023, up by 73% yoy, based on Association of British Insurers data. De-risking volumes are expected to peak in 2026–27, according to LCP (see Figure 1). However, we expect increased regulatory scrutiny on the funded reinsurance arrangements underpinning some of these transactions to slow activity growth in 2024/25. In the Netherlands, pension reform in 2023 opened the door to a EUR 1.5tn risk transfer market.²

Figure 1. UK defined benefit pension de-risking volumes, GBP billion

Stock and private equity-owned life insurers' business models are converging. On the one hand, private equity-owned insurers are expanding direct retail sales (especially of fixed annuities) to compete in the historic domain of traditional stock insurers. In 2023, they issued USD 58bn of US individual annuities, or roughly 18% of the total USD 320bn industry issuance, a twofold increase since 2019 (see Figure 2). In Europe, where regulators are more sceptical of private equity, their entry into the life sector has been slower. On the other hand, traditional life insurers are finding alternative ways to retain business to avoid divesting assets, such as by using more captive insurers. They are also raising institutional capital in affiliated special purpose vehicles called "sidecars", which transfer a portion of risk to third-party investors. These can be used to grow sales and make block reinsurance transactions.

Figure 2. US individual annuities direct business, first year and single premiums, USD billion

Asset management capabilities will be the first differentiator in the race for assets. The "hunt for yield" in the low-rate years led to deeper integration of life insurance and asset management. Large insurers built sophisticated asset management divisions, including expertise in private asset origination, and expanded their investment-linked product offerings in which policyholders bear more of the investment risk. Mobilising this asset management capacity for re-risking products and innovation will be key for success in gaining assets.

Attractive and competitive product offerings will be a second differentiator. In the US, higher rates supported a rotation from variable to fixed savings products in the past two years. The next phase, if rates stay elevated, is likely to be the re-risking of products, but insurers are being patient and cautious. In Europe, a complete pivot back to traditional business appears unlikely. We expect the saving business mix to feature more hybrid products that typically offer fewer guarantees and investment performance-linked benefits, and can cover biometric risks, eg, individual death cover attached to investment-linked products. These are less sensitive to market movements than pure unit-linked products yet offer more upside than traditional life offerings.