What does ‘the restructuring tsunami’ mean for annuities?

The emergence of private equity and asset-manager-backed insurance companies is leading to what Conning researchers call “a restructuring tsunami” in the annuity industry.

Scott Hawkins, Conning managing director and head of insurance research, described the role of new parties entering the annuity market and the shifting competitive landscape during the American Council of Life Insurers’ 2022 annual conference.

“We've been trying to understand how and why these companies are emerging and how they might change the nature of the business,” Hawkins said. “For an agent, understanding that is important because a contract that they sold with carrier XYZ may be acquired, or reinsured more accurately, by another company, and they may have to explain that to a client and help them understand what's going on.”

Other reasons an advisor needs to understand these emerging changes, Hawkins said, include:

• Those who follow the annuity industry in the news have raised concerns about the ownership structure, and what that means for the security of an annuity product that's being sold. “So if you try to place a new product that is manufactured and distributed by one of these carriers, the clients themselves may have concerns,” he said.
• The insurance agent, along with their general agents and broker-dealers, have fiduciary responsibilities to understand the nature of the carriers they're dealing with. “There's only so much shelf space that an agent or agency has, so trying to determine which carriers you put on your shelf, and which products, is an important aspect,” he said.

Conning conducted research on the major concerns or questions that people inside and outside the industry have about the emergence of private equity and asset-manager-backed insurance companies. Hawkins said those questions include:

• Why is this happening?
• How are these companies using reinsurance and to what extent is that different or something to think about?
• How and to what extent are they changing the asset management structure of the companies that they own?
• Where is this leading the industry going forward in terms of opportunity, where might they be headed next, and how other insurers are finding opportunities as a result of these new entrants?

Supply and demand cited

Hawkins said Conning’s research said the main reason why these companies are emerging is because of supply and demand coming together. The demand is coming from other annuity insurers with legacy blocks of annuities.

“With this prolonged low interest rate environment, the margins on annuity blocks – in particular, on fixed and even indexed annuities – have been under pressure for the better part of a decade,” he said.

“As insured portfolio yields decrease, their guarantees on older blocks of policies still have to be met, and that squeezes the profitability. From the demand side, the asset managers are looking to acquire policies that generate what they refer to as permanent capital. You have a case of an established carrier with a block of business, and a new carrier looking to acquire it.”

Conning researchers looked at the use of reinsurance because of concern that many policies are being reinsured offshore to Bermuda.

“The use of Bermuda as a reinsurance domicile is not at all unusual in the insurance industry,” Hawkins said. “It's a well-established, well-known global center for reinsurance. It has regulatory equivalency with both the National Association of Insurance Commissioners, as well as the EU Solvency Two Regime. There are very large insurers that have affiliated reinsurers in there handling property/casualty, life and annuity business. The fact that they in Bermuda is not in and of itself an issue.”

Researchers also wanted to understand to what extent these companies are changing asset management strategies, Hawkins said.

“Are they being riskier in what they're taking on? How do they differ from other similar size and similar focused annuity companies? We created a control group where we said, ‘What's the average profile for these asset management backed companies?’ And we found about a half-dozen other companies that matched them in terms of premium size, asset size and focus on annuities.”

What researchers found, he said, is that asset-management owned companies were able to increase the use of private bonds and private credit that was manufactured by themselves because they're an asset manager.

Where is this going in the future?

Hawkins said he sees asset-management owned companies moving beyond fixed and indexed annuities and into variable annuities. “We also think companies will be looking to pick up life insurance liabilities, as well as pension risk transfers,” he said.

For companies that are not asset manager or private equity backed insurers – such a mutual company, a smaller midsize private stock company, or another public stock company – “we think this trend gives you, as an insurer, an opportunity to rethink what and where you really want to focus your business,” Hawkins said.

“Where are your best opportunities to create value? That may require you to restructure your balance sheet by offloading liabilities you no longer want. And in doing so, it'll free up capital, which you could then reinvest in those areas where you do think you have a strong growth potential or a strong competitive advantage.”

Hawkins said the emergency of private equity or asset management based insurance companies “will enable an insurance company to restructure their balance sheet, refocus on where they want to go, and in doing so, specialize in where they want to play in the insurance market.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].