July 2024
Matthew Macreadie
What differentiates Resolution is that it has a conservative approach to risk. Risk management is central to everything they do as a life insurance company. They also have a long track record in the life industry since 2003 (over 20 years). This strong track record, alongside partnerships with Blackstone and Nippon Life, helps Resolution to generate more value from their investments and serve life insurance companies in the marketplace. Under the partnership, Blackstone manages the private asset side of the investment book. The balance sheet and solvency are the last two key pillars that the company manages well. This also allowed the company to pay a dividend of US$240m in 2023, up from the previous year.
Resolution Life (Resolution) is a global life insurance group focused on reinsurance and the acquisition and management of life insurance policies. Headquarters are in Bermuda, with main customers being primary life insurers in mature markets, including North America, Europe, Australasia, and Asia. There are three core business units:
- Resolution Re the global reinsurance business.
- Resolution Life US where they buy/sell existing life and annuity portfolios from US companies, acquiring the assets and liabilities
- Resolution Life Australasia where they buy/sell existing life and annuity portfolios from Australia/NZ, acquiring the assets and liabilities
Resolution Life currently has US$85bn (AUM) and has deployed US$5.7bn of capital across 4.3m policies (as of 31 Dec 2023). By providing reinsurance, Resolution takes on the risks and responsibilities created by life insurance companies. Furthermore, they also acquire portfolios of existing life and annuity portfolios from established insurers, who want to free up capital.
The company is privately owned by a diverse group of global investors. As of 31 Dec 2023, the group had raised US$8bn of commitments across c.60 investors. In 2023 alone, they raised US$3bn in equity capital which included a US$500mn investment from Blackstone and an additional US$1bn from Nippon Life. In relation to business and financial performance over 2023:
- Risk underwriting, management of capital position/costs, and earnings from the investment book drove underlying earnings. Over the year, cash was generated in line with company expectations, despite not rotating out of assets as fast as expected. Capital markets activity in 2023 was muted due to several factors, including the sustained higher interest rates and the banking crisis that affected the US and Switzerland. This meant that there were fewer attractive investment opportunities, especially for higher-yielding private assets.
- Operating expenses were slightly higher than anticipated. The separation and digital transformation programmes remain on track for the business. Cost management is a priority area for 2024.
Capital position is robust. Resolution increased borrowings by US$1bn to fund our growth, with US$750m of new bank debt, and an increase in revolving credit facility by a further US$250m. - Under the Bermuda Solvency Capital Requirement, the Group solvency ratio is 181%. Resolution has an investment grade rating from Moody’s with an implied A3 notional Insurance Financial Strength for the Group and a Long-Term Issuer Rating of Baa2 for the Issuer, as well as a BBB Long-Term Issuer Default Rating from Fitch for the Issuer.
Heading into 2024, Resolution is seeing more optimism in the capital markets. Inflation is easing and they expect the interest rate cycle to have peaked, which is positive for asset rotation.
The table below shows the group’s statutory premiums from its insurance and reinsurance activities and statutory investment return, net of investment expenses and realised gains/losses. Furthermore, the slide below shows the financial review for 2023.
Capital requirements are calculated in accordance with Bermuda Solvency Capital Requirement. As of 31 Dec 2023, the capital position was as follows:
Relative Value (Z-Spread Basis vs USD Insurance Comps)
The relative value of RESLIF versus other USD insurance comps is quite attractive. Although life insurers tend to price at a discount vs insurer, RESLIF prices well outside other USD insurance comps. Compared to AUD Tier 2 banking comps, there is around a 250bps discount in valuation (160bps for AUD Tier 2 paper). The rating differential (BB+ to A-) or four notches, implies some discount. However, 250bps seems well wider than fair would suggest. If you factor in 25bps for 3 notches (A- to BBB-) and then an equivalent 100bps by dropping (BBB- to BB+ or high-yield) this would imply a fair value spread differential of 175bps. Thus, we would expect at least 75bps of spread compression over the near term.
