If you’re thinking that there seems to be a lot of private equity behind the annuity business these days, you are not wrong.
For example, in the fourth quarter of 2019, just before the pandemic struck, private equity-owned companies accounted for 26.7% of fixed index annuity sales, according to data from Moore Market Intelligence. By the third quarter of 2021, that percentage rose to 41% of $17.3 billion in sales.
Observers say this is either the best or worst thing to happen to the life and annuity business – sometimes it’s the same person saying both.
Private equity firms have helped large legacy companies by buying their closed blocks of business, such as Principal Financial selling its fixed annuity and universal life business to the investor Sixth Street in a recent $25 billion deal. The money will help Principal delve into more profitable businesses, such as group benefits.
Last year saw a flurry of mergers and acquisitions, including huge deals such as Apollo combining with Athene and Blackstone buying a 9.9% chunk on AIG’s Life & Retirement business as part of an ongoing, longer-term relationship.
The main benefit for PE firms is the capital that it can invest more freely without the oversight and complications that public companies endure. Even without pushing the investment envelope, the blocks of business come with a decent spread between revenue and cost, said McKinsey in a recent article, “Why Private Equity Sees Life and Annuities as an Enticing Form of Permanent Capital.”
“The balance sheets of life and annuities companies are well stocked with assets (to match the liabilities of future payouts and indemnities), but until payout, these assets need to be invested to generate returns,” according to the article. “And in many cases, the cost of servicing the liabilities is significantly lower than the potential investment return. The spread represents an attractive margin.”
On top of that margin, by using what the authors called the “value-creation playbook,” PE owners can generate internal rates of return of 10% to 14%. They can do this by moving money into higher risk and return assets.
“One analysis found that they generated 62 basis points (bps) higher investment yield than the industry average,” according to the article. “Within three years of acquisition, 80% of these insurers had increased their allocation to asset-backed securities (primarily collateralized loan obligations), and over half of their investments were in private loans (compared with 37 percent for the industry).”
While admiring the returns, the higher risk part of the proposition worries veteran observers such as Sheryl Moore, CEO of Wink Inc., a data analysis company. Securitized debts and similar investments remind her of the risky instruments that helped paved the way for the 2008 financial collapse.
Moore added that she is not an expert in those financial instruments, but has seen risky behavior that accelerated growth for some companies. She herself had to rescue her own annuity when a company went into receivership and “lost” her contract.
Although most of the PE companies may be considered trustworthy stewards of contract owners’ money, the opacity of private equity obscures bad behavior by some outliers. A recent example was Greg Lindberg, a North Carolina financier who had acquired Colorado Bankers Life as part of the Global Bankers Insurance Group. Lindberg is now serving a seven-year prison sentence for attempting to bribe North Carolina’s insurance commissioner. The companies are in receivership.
Lindberg used the insurance companies as a piggy bank for other ventures, according to records pulled together by The Wall Street Journal. Lindberg redirected $2 billion to buy companies, lavish estates and yachts, among other things, WSJ found.
“The sheer scale of Mr. Lindberg’s use of insurance assets to invest in his own businesses has little precedent in recent decades, industry experts say, and exposes hundreds of thousands of policyholders to an unusual and potentially risky strategy,” according to the article. “Mr. Lindberg is among a wave of financiers who have snapped up life insurance companies in recent years, contending they can do better than traditional owners in investing the vast assets on insurers’ books in a low interest-rate environment. Some in this new class of owners have deployed unusual financial structures and complex investments, challenging state regulators who have struggled to stay on top of the changing environment.”
The Lindberg case is extreme, but regulators and raters are keeping a closer eye. In December, A.M. Best announced that it was placing annuity company SILAC Insurance of Salt Lake City under review because “the company’s capital was strained significantly by rapid top-line growth and an increase in below investment grade bonds in its general account investment portfolio.”
SILAC’s CEO is Stephen Hilbert, who was a founder and CEO of Conseco, an insurance conglomerate that went bankrupt in 2002, two years after he was “retired” from the company following severe losses. Conseco became CNO Financial Group.
Conning counts itself as one with a balanced view of private equity. While acknowledging that PE firms have been able to relieve legacy companies of their blocks of business, Scott Hawkins, Conning life-annuity researcher, also said during a recent webinar that the opacity of the companies is disconcerting.
“When you look at these companies, their structure can be opaque,” Hawkins said. “Who owns whom? Where's the risk actually located? So, trying to parse that can be difficult, and that's a risk that companies need to think about.”
Hawkins added that these types of reinsurance are nothing new, although the investment strategies are untested by a long arc of time.
“There is some degree of investment risk, how will they do it in in a hard market downturn?” Hawkins said. “So, as they start to pick up individual life risks, their forte is investment management, what's their ability to understand and manage different types of risks, mortality risk, for example. There is a certain amount of governance risk here.”
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].