Introduction

The second-largest U.S. pension risk transfer transaction on record, in combination with favorable conditions for similar de-risking activity by defined benefit plan sponsors, should push full-year 2022 activity to a new all-time high and set the stage for continued momentum into 2023.

Subsidiaries of Prudential Financial Inc. and MetLife Inc. on Sept. 13 issued nonparticipating single-premium group annuity contracts to International Business Machines Corp.'s personal pension plan in equivalent amounts of $8 billion, effectively transferring $16 billion in obligations associated with certain pension benefits to about 100,000 participants and beneficiaries that began to be paid prior to 2016.

The transaction ranks behind only Prudential's trailblazing 2012 deal where it issued a $25.1 billion group annuity contract to General Motors Co. in November 2012 in conjunction with the automaker's settlement of its remaining obligations under its U.S. Salaried Defined Benefit Pension Plan. Prudential and Verizon Communications Inc. closed a separate $7.5 billion transaction during the fourth quarter of 2012, pushing pension risk transfer activity for the period to levels the industry has not since approached even as transactions of the kind have occurred with increasing frequency.

S&P Global Market Intelligence projected in July that direct group annuity premiums and considerations in full year 2022 would exceed for the first time the record levels achieved in 2012 largely as a result of those two transactions. The size of the IBM deal and the likelihood of other significant transactions through the balance of the year suggest our projection for 12.3% year-over-year growth in group annuity business volume may be too conservative.

A landmark deal

Under terms of the annuity contracts, which effectively remove IBM's investment, longevity and other risks associated with the covered pension obligations representing about 40% of its U.S. qualified defined benefit plan, Prudential Insurance Co. of America and Metropolitan Life Insurance Co. will each be responsible for paying 50% of benefits due beginning Jan. 1, 2023. Prudential will serve as the lead administrator.

LIMRA survey data shows that buyout transactions, like those the insurers entered with IBM totaled $14.98 billion in the first half of 2022. There was $15.79 billion in buyout volume in the third quarter of 2021, according to LIMRA. That period ranked as the most active for the business since the fourth quarter of 2012, which had a tally of $34.58 billion, largely due to the blockbuster GM and Verizon transactions.

The combination of the IBM announcement, an August transaction where Alcoa Corp. purchased group annuity contracts with two Athene Holding Ltd. subsidiaries to transfer $1 billion of defined benefit pension plan obligations for certain U.S. retirees and beneficiaries, and recently disclosed deals by Fidelity National Financial Inc.'s Fidelity & Guaranty Insurance Co. in the quarter's first two months totaling about $620 million in volume pushes the third quarter 2022 buyout total past $17 billion.

It is highly unlikely that this activity represents the quarter's full deal volume given that many smaller transactions may not be publicly announced at inception if at all. But using $17.62 billion as the quarterly mark puts total buyout activity for the first three quarters of 2022 at $32.60 billion. Full-year activity in 2012 and 2021, which rank as the two most active periods on record according to LIMRA, totaled $36.00 billion and $34.15 billion, respectively. The fourth quarter traditionally ranks as the most active period for pension risk transfer activity, averaging $11.81 billion for the final three months over the past five years.

Even if the industry achieves only a fraction of that amount in the fourth quarter, full year 2022 will surpass the 2012 high-water mark.

Not 'slowing down any time soon'

A combination of factors favors continued market expansion, even from the high levels the industry is likely to hit in 2022.

Higher insurance industry capacity in the form of a growing pool of carriers targeting different segments of the market has coincided with greater appetite from those carriers during a time of rising interest rates.

"We've already done the same amount of business year-to-date that we did last year in the PRT space, a little over $1.1 billion," said Fidelity & Guaranty Life President and CEO Christopher Blunt during a Sept. 13 appearance at an investor conference. "I think that's just [a] warm-up, and I don't think that's slowing down any time soon."

At the same time, sponsors have generally experienced favorable trends in the funded status of their defined benefit plans in a development that typically has a direct correlation to their willingness to transact.

A review of S&P Global Market Intelligence data for 745 publicly traded U.S. companies with at least $1 million in domestic pension benefit obligations at year-end 2021 and some amount of obligations in 2020 finds that 31.4% were 100% funded or better, up from just 16.2% 12 months prior. In IBM's case, the U.S. qualified defined benefit pension plan had assets as of Dec. 31, 2021, fair value of $51.85 billion relative to benefit obligations of $46.46 billion, implying that it was funded at 111.6%.

And even with the high volume of activity to date in 2022, there remains no shortage of plans with significant outstanding obligations. Among the 745 companies, for example, projected domestic pension benefit obligations totaled $1.92 trillion at year-end 2021, down from $2.05 trillion as of Dec. 31, 2020. The decline reflected, in part, curtailment and settlement activity of $31.61 billion, which included the impact of large pension risk transfer deals involving the likes of HP Inc., Lockheed Martin Corp., Alcoa and Lumen Technologies Inc.

Eighteen of the 43 corporations with domestic pension plan assets of more than $10 billion at year-end 2021, including IBM, reported no curtailment or settlement activity during the past 10 years. But while the market benefits from demand from companies new to pension risk transfer, it also has been fueled by repeat activity from plan sponsors that previously turned to insurers to settle portions of their obligations. Lockheed Martin and Alcoa are among the repeat group annuity purchasers in 2022, for example.

Record group annuity writings

The combination of heightened pension risk transfer volumes and strong demand for stable value products in the context of employer-defined contribution plans during a tumultuous period in the U.S. stock and bond markets led to a 35.0% year-over-year increase in direct group annuity premiums and considerations during the second quarter. For the first half of the year, volume in the business line rose by 25.2% to $88.15 billion.

Using that figure as a full-year run-rate would put the industry well on its way to achieving our 2022 projection of $179.88 billion. The typical seasonality associated with pension risk transfer activity means that premium volumes tend to be somewhat back-end weighted in a scenario that could push full-year premiums and considerations well over $180 billion. The size of the IBM transaction in combination with the active first half of the year implies that surpassing the previous full-year high of $163.89 billion in 2012 is all but assured.