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AFG enters into $5.7bn annuity reinsurance transaction with Global Atlantic

27th October 2020 - Author: Luke Gallin

American Financial Group, Inc. (AFG) has entered into a $5.7 billion fixed and fixed-indexed annuity reinsurance transaction with Commonwealth Annuity and Life Insurance Company, a subsidiary of Global Atlantic Financial Group Limited.

handshakeUnder the terms of the agreement, which has an effective date of October 1st, 2020, AFG’s Annuity subsidiary, Great American Life Insurance Company (GALIC), ceded roughly $5.7 billion of in-force traditional fixed and indexed annuities, representing 15% of its in-force business, and transferred related investments to Commonwealth.

AFG notes that because the assets transferred have a lower average yield than its overall annuity portfolio yield, and the policies ceded have an overall cost of funds that is more than that of AFG’s retained business, the firm expects to earn an increase in the net interest spread on its retained $34 billion of annuity reserves.

Furthermore, as a result of the assets and reserves transferred in this deal, it’s expected that this arrangement will free up between $300 million and $325 million of GALIC’s statutory capital in Q4 2020. Additionally, the deal is expected to create $375 million to $400 million of additional excess capital for AFG.

Over the coming year, AFG is set to receive approximately $50 million from Commonwealth in exchange for the value at expiration of the options associated with the fixed indexed annuity policies ceded. AFG explains that any gains or losses on these will be determined based on the market values of the options upon their expiration, and will be recorded as a non-core item each month. As at September 30th, 2020, the market value of these options was approximately $130 million.

S. Craig Lindner, AFG’s Co-Chief Executive Officer (CEO), said: “This transaction presents an exceptional opportunity for AFG to further strengthen its already significant amount of excess capital, and is expected to result in higher core operating earnings and core operating returns in both the Annuity segment and AFG.

“The agreement will have no impact on AFG’s relationship with, and commitments to, our annuity policyholders and distribution partners, and AFG will continue serving the annuity market as a leading provider of fixed and indexed annuity products. Global Atlantic has demonstrated strong capabilities partnering with us in the past, and they delivered a custom solution to meet our financial objectives.

“AFG’s excess capital prior to this reinsurance transaction was approximately $1 billion at September 30, 2020, including parent cash of nearly $600 million. The majority of the additional excess capital freed up at GALIC will be paid as a dividend to AFG by GALIC; the remaining amount will be retained by GALIC to further increase its excess capital levels.

“We will continue to evaluate opportunities for deploying AFG’s excess capital, including the potential for healthy, profitable organic growth, and opportunities to expand our Specialty Property & Casualty niche businesses through acquisitions and start-ups that meet our target return thresholds, share repurchases and special dividends.”

Global Atlantic plans to leverage third-party capital benefits of the previously announced Ivy Co-Investment Vehicle LLC to co-invest in the transaction alongside its subsidiaries. Business ceded to Ivy Re Limited will be managed using Global Atlantic’s leading risk and investment management capabilities.

With this reinsurance arrangement, Global Atlantic says that it further evidences its position as a leading reinsurance franchise in the U.S. life and annuity market, having reinsured approximately $40 billion of assets since its inception in 2004.

Manu Sareen, who heads Global Atlantic’s Institutional business, commented: “We are proud to partner with such a high caliber client in Great American to help them achieve their desired financial and capital management objectives.

“Global Atlantic’s Institutional platform provided a highly customized and accretive solution, while working collaboratively and quickly to meet our client’s goals.”

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