The reinsurance of annuities, including immediate annuities, substandard annuities, and fixed deferred annuities, can result in powerful balance sheet benefits for the ceding insurer. First, by transferring assets to the reinsurer in an amount less than the ceding insurer’s statutory reserve, permanent surplus is created. Second, the risk-based capital ratio of the ceding insurer will improve, as these assets and liabilities come off the books. Third, depending on various pricing parameters, the premium paid for the coverage may be less than the GAAP or IAS reserve held by the ceding insurer, producing a fixed stream of future income. Finally, as a risk-transfer mechanism, the ceding insurer is relieved of various risks, including longevity, asset default, and interest rate risks.
As always, Alpha Re establishes proper trust accounts and/or letters of credit to allow the ceding insurer to take full balance sheet credit for the reinsurance ceded.