MS&AD Insurance Group Holdings Inc. has expanded its partnership with Australian life & annuities specialist Challenger via a new quota share reinsurance deal covering annuities issued by MS&AD’s subsidiary, Mitsui Sumitomo Primary Life Insurance Company Limited (MS Primary).
Under the arrangement, MS Primary will provide to Challenger Life an annual amount of reinsurance, across both Australian and US dollar annuities, of at least ¥50 billion (U.S $450 million) per year for a minimum of five years.
Additionally, MS&AD intends to increase its Challenger shareholding over 15% of issued capital and seek representation on the Challenger Limited Board, subject to regulatory approval.
MS&AD first invested in Challenger in August 2017, taking a 6.3% stake in the firm for AU $500 million (U.S $354 million) in an effort to diversify its business outside of Japan.
Since November 2016, Challenger has partnered with MS Primary, a leading provider of foreign currency annuities in Japan, to reinsure Australian dollar denominated annuity products.
Once MS&AD’s Challenger shareholding exceeds 15%, and the reinsurance of U.S dollar annuities with MS Primary has commenced, MS&AD will nominate one non-executive director to join the Challenger Limited Board.
“Today’s announcement reflects the success of the strategic relationship Challenger and MS&AD commenced three years ago,” said Challenger CEO Richard Howes. “This expanded alliance leverages the strengths of both businesses to create opportunities for continued growth.”
MS&AD President and CEO Yasuyoshi Karasawa also commented: “The expansion of our relationship to cover a wider range of annuities and include Board representation for MS&AD, demonstrates our commitment and confidence in Challenger.”
Challenger Life currently reinsures an Australian dollar 20-year term product and an Australian dollar lifetime product, and has entered into a new agreement with MS Primary to commence reinsuring the U.S dollar version of the 20-year term product.
It will provide a guaranteed interest rate and assume the investment risk in relation to those policies issued by MS Primary and reinsured by Challenger, which has around 15% of its fixed income portfolio in U.S dollar assets and will hedge any residual foreign currency risk in relation to the agreement.
The parties noted that the foreign currency fixed annuity market in Japan has increased by 70% over the past three years and now represents ¥3.6 trillion in annual sales.
Recently, the relative attractiveness of US dollar annuities has increased due to changes in U.S and Australian interest rates, resulting in a shift from Australian to U.S dollar products for the foreign currency annuity sales in Japan.
