Private equity buys annuity and life insurance contracts


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Private equity firms are buying out insurers – and the policies they own – at a breakneck pace.

Some groups, especially financial advisers, fear the trend could be bad for consumers with annuity and life insurance contracts.

Critics fear that buyers will derive profits from clients – via higher costs – to increase returns for their investors. Consumers can have had such insurance for years and depend on a certain price for their financial plans.

They may have purchased a policy based on the financial strength or credit rating of an insurer. New buyers may not have the same rating, which means its ability to pay for future benefits, advisers warned.

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“There is nothing good in this for the insured,” Larry Rybka, chairman and CEO of Akron, Ohio-based Valmark Financial Group said of the private equity trend. .

But others don’t see a five-alarm fire scenario.

Many of the biggest buyers are well-capitalized companies, and not all deals are inherently bad, some analysts say. Policyholders can benefit from potentially higher investment returns in a low interest rate environment.

“I don’t know if I would say [they’re] “baseless,” said Dafina Dunmore, chief analyst of alternative investment managers at Fitch Ratings, of the fears. “I would say they are overkill.”

‘Watch carefully’

The pace of acquisitions has accelerated since 2014, according to Refinitiv, which tracks financial data.

There were 191 privately-backed insurance contracts last year in the United States, breaking the previous record of 154 set in 2019.

Buyers have paid $ 12.1 billion so far in 2021 for the deals, eclipsing the record of $ 9.7 billion set in 2018, according to Refinitiv.

“By definition, [private equity’s] the mandate is not for policyholders, “said Gregory Olsen, chartered financial planner and partner at Lenox Advisors.” It’s to make so much money for their investors [as possible]. “

Life insurance and annuity policies have various annual fees for consumers. These costs can be increased up to a certain ceiling guaranteed by the contract.

Advisors are concerned that private equity buyers will increase these various fees to their maximum value. This can result in erosion of investment income in a variable annuity or the higher annual premiums required to maintain a life insurance policy, for example.

“I would be watching spending closely,” Olsen said.

Worried or disadvantaged consumers may be able to swap their annuity or life insurance for another.

However, such transfers are complicated, the advisers said. Consumers may inadvertently trigger penalties and fees, or be in a better position to keep their current contract even with higher annual fees, they said.

Types of offers

Acquisitions are often complicated and can take different structures, which has different implications for consumers.

For example, a buyer can buy a controlling stake in an insurer or buy it outright.

In February, KKR bought a 60% stake in insurer Global Atlantic for more than $ 4 billion. Over 2 million people have fixed annuities, life insurance and other policies with Global Atlantic.

In January, Blackstone agreed to buy Allstate Life Insurance Company for $ 2.8 billion.

The life insurer represents 80% – or $ 23 billion – of Allstate Corporation’s life insurance and annuity assets. (Allstate is attempting to sell the remaining $ 5 billion currently held by Allstate Life Insurance Company of New York, it said in the announcement of the deal.)

In these types of transactions, private equity firms may have an incentive to avoid increasing costs and risking reputational damage that could cost them future business.

Global Atlantic, for example, has not changed policyholder fees on existing policies since the change in ownership, according to a KKR spokesperson.

“As the owner, KKR has a vested interest in the long term success of Global Atlantic, which can only be achieved through strong and trusting relationships with policyholders and their financial advisors and by continuing to offer competitive products. “, According to a statement sent by email. .

Other recent agreements concerned legacy lines of business closed to new customers. These types of trades can be a bit more volatile because that same incentive doesn’t exist, the advisers said.

Sixth Street Partners announced in January an agreement to acquire Talcott Resolution Life Insurance Company, which owns a large block of property insurance business. Talcott manages more than $ 90 billion for approximately 900,000 clients, including nearly 600,000 annuity policyholders.

The P / E angle is really about bringing together “sticky” assets.

David Havens

Global Insurance Analyst at Imperial Capital

The current owners of Talcott are a group of private equity firms that purchased the annuity business of Hartford Financial Services Group, mostly made up of legacy variable annuity contracts, in 2018.

Likewise, in 2018 Voya Financial sold over $ 50 billion of former fixed and variable annuities to Apollo Global Management, Crestview Partners and Reverence Capital Partners. Buyers renamed the segment Venerable Insurance.

Allison Proud, a spokesperson for Venerable, declined to comment. Allison Lang, a spokesperson for Talcott, also declined to comment.

Low interest rates

Insurers have largely sold their insurance businesses due to interest rates still low since the Great Recession, analysts said.

Low interest rates correspond to lower returns on the bonds that underpin their insurance portfolios. This, in turn, makes it more difficult to retain the cash needed to pay for the promised insurance benefits.

Selling a block of business allows insurers to free up capital to invest elsewhere, according to Douglas Meyer, senior life insurance analyst at Fitch.

Charlie Lowrey, chairman and chief executive of Prudential Financial, said in February on a call to investors that the insurer was considering the potential sale of “low growth companies” like annuities and life insurance to free up money. $ 5-10 billion in capital, for example.

Private equity firms can take advantage of insurance pools, consumer insurance premiums, and other contract fees, such as a constant flow of reliable assets. Having this “permanent capital” at their disposal means they won’t have to raise funds in the market as easily, analysts say.

“The P / E angle is really about bringing together ‘sticky’ assets,” David Havens, global insurance analyst at Imperial Capital, said in an email.

KKR, for example, added $ 90 billion in assets under management with its purchase of Global Atlantic.

And private equity managers can be invested in a wider range of assets and, in turn, achieve higher returns for policyholders than traditional bonds, Fitch’s Dunmore said.

“We believe that the higher returns net of all fees that we have produced – while maintaining good credit quality – are particularly vital for policyholders in this low interest rate environment,” according to Matt Anderson, a door – Blackstone’s speech.

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