It's debatable if the fiduciary standard is 'higher' than suitability. But the better question might be, who's holding the bar?
By Cyril Tuohy
Noninsurers that have recently entered the annuity market are likely to stick around as they benefit from rising rates and apply their well-honed asset management skills, according to an analysis.
Two factors have created an opening for this group that has muscled its way into annuities from outside the traditional life insurance market: the retreat by insurance carriers from variable annuities (VAs), and the changing spreads that favor fixed and indexed annuities, said Scott Hawkins, an analyst with Conning & Co.
“They see some advantage of being medium or long-term players,” Hawkins told InsuranceNewsNet.
Four companies have made 19 acquisitions of life and annuity companies in the past five years, according to the Conning report. They are: Apollo Global Management, majority owners of Athene Holding; Goldman Sachs Group, a minority owner of Global Atlantic Financial Group; Guggenheim Partners, majority owner of Guggenheim Life, Security Benefit and Delaware Life, and Harbinger Group, majority owner of Fidelity & Guaranty Life. Assets under management exceed $146 billion.
Some analysts and state regulators have questioned the companies’ commitment to annuities. The annuity business, which pays out over decades, is no place for short-term players with the in-and-out mentality that pervades private equity funds.
But Steve Webersen, director of research at Conning, said there are nuances between the new market entrants and private equity funds. “These groups are not pure private equity funds per se, they don't have to recycle capital in five or seven years,” Webersen said.
There are plenty of signs that the companies can be counted on to remain in the market, not the least of which is the growth of the long-term growth of the U.S. retirement market. This is an opportunity with an estimated $23 trillion in retirement assets, according to Conning.
“They’ve been raising additional capital, which will enhance their ratings and their ability to generate new business,” Hawkins said.
The companies, according to a report titled “The Retirement Market Attracts New Entrants 2014,” have just about completed the acquisition stage used to enter the market. The companies are now ready to embark on a different phase.
Companies are raising more capital, which will enhance their ratings and make it easier to generate new business, the analyst said.
The noninsurers are in the midst of rebuilding annuities sales via higher crediting rates compared with a group of 16 peer insurance companies.
“On new business, they are offering some of the best rates for annuity sales and they are trying to build additional assets,” Webersen said.
The percentage of individual annuity retirement sales increased from 62 percent of their total business in 2009 to 86 percent in 2013, the report found.
Guaranteed Investment Contract (GIC) deposits, which barely registered for the new entrants in 2009, accounted for 8 percent of total retirement sales for the group, the report also said.
GICs guarantee the repayment of principal along with a fixed or floating interest rate for the specified term. Why would companies be selling GICs if they were planning to exit the market in three or four years?
The new entrants, the analysts also said, have approached the annuity market from the perspective of asset managers. In that context, they are not unlike the asset management subsidiaries of the giant life insurance carriers such as MetLife and Prudential.
These two long-time industry pillars – MetLife and Prudential – started as life and annuity insurers and branched into asset management.
The new noninsurers appear to be doing the reverse, the analysts said. They are entering the annuity market as asset managers and then slowly building their annuity business.
Meanwhile, the newcomers are doing the annuities industry a world of good. They have brought new capital into the annuity market, re-energized annuity sales, and forced other life insurers to “raise their game,” Hawkins said.
“While the medium-term offers a combination of opportunity and challenges, alternative capital has entered this market, and the new entrants are likely here to stay,” the Conning analysts conclude in their report. “These companies have the capacity to raise the bar in terms of generating investment returns, leading to the industry’s ability to accept more retirement assets and meet the needs of a growing population.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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