Private equity buys annuity and life insurance. That can be bad for consumers

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Private equity firms are buying up insurers – and the policies they hold – at a feverish pace.

Some groups, particularly financial advisors, fear the trend could be bad for consumers who own annuity and life insurance contracts.

Critics fear that buyers will take profits from customers – at higher costs – in order to increase returns for their investors. Consumers may have such insurance for years and rely on a certain price for their financial plans.

They may have bought a policy based on an insurer’s financial strength or credit rating. New buyers may not have the same rating, which means they can pay future benefits, advisers warned.

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“This is bad news for policyholders,” said Larry Rybka, chairman and CEO of Akron, Ohio-based Valmark Financial Group, of the private equity trend.

However, others do not see a five-alarm fire scenario.

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

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

‘Look closely’

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

In the US, there were 191 private equity-backed insurance contracts last year, surpassing the previous record of 154 set in 2019.

The buyers paid $ 12.1 billion for the deals so far in 2021 – surpassing the record of $ 9.7 billion set for full-year 2018, according to Refinitiv.

“By definition, [private equity’s] The mandate does not lie with the policyholders, “said Gregory Olsen, certified financial planner and partner at Lenox Advisors.” It’s about making as much money as possible for their investors [as possible]. “

Consumers incur various annual fees for annuity and life insurance. These fees can be increased up to a certain, contractually guaranteed upper limit.

Consultants are concerned that private equity buyers will increase these various fees to their maximum value. The result can be, for example, eroded investment returns in a variable annuity or higher annual premiums required to maintain a life insurance policy.

“I would watch the spending closely,” said Olsen.

Concerned or adversely affected consumers may be able to swap their pension or life insurance for another.

However, such transfers are complicated, advisors said. Consumers could accidentally incur penalties and fees, or be better able to stick with their current contract even with higher annual fees, they said.

Types of deals

Acquisitions are often complex and can take on different structures that have different effects on consumers.

For example, a buyer can acquire a controlling interest in an insurer or buy it directly.

In February, KKR bought a 60% stake in insurer Global Atlantic for more than $ 4 billion. More than 2 million people have fixed pensions, 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 the life insurance and annuity assets of Allstate Corporation. (Allstate is trying to sell the other $ 5 billion currently held by Allstate Life Insurance Company of New York, the contract announcement said.)

In such dealings, private equity firms may have an incentive to avoid cost increases and risk reputational damage that could cost them future deals.

For example, according to a KKR spokesman, Global Atlantic has not changed policyholder fees on existing policies since the change of ownership.

“As the owner, KKR has a vested interest in the long-term success of Global Atlantic, which can only be achieved through strong, trustworthy relationships with policyholders and their financial advisors and by continuing to offer competitive products,” it said in an email.

Other recent deals were in existing businesses that were closed to new customers. These types of transactions can be a little shakier as they don’t have the same incentive, advisors said.

Sixth Street Partners announced in January a purchase agreement for Talcott Resolution Life Insurance Company, which owns a large block of legacy insurance business. Talcott manages over $ 90 billion for approximately 900,000 customers, including nearly 600,000 annuity contractors.

The P / E angle is really there to collect assets that are “sticky”.

David Havens

global insurance analyst at Imperial Capital

The current Talcott owners are a group of private equity firms that bought Hartford Financial Services Group’s annuity business in 2018, which consists largely of old variable annuity contracts.

Similarly, in 2018, Voya Financial sold more than $ 50 billion in fixed and variable annuities to Apollo Global Management, Crestview Partners, and Reverence Capital Partners. The buyers have renamed the segment Venerable Insurance.

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

Low interest rates

According to analysts, insurers have largely sold the insurance business due to persistently low interest rates since the Great Recession.

Low interest rates mean lower returns on bonds that prop up their insurance portfolios. This in turn makes it difficult to have the cash required to pay the promised insurance benefits.

By selling a block of business, insurers can free capital to invest elsewhere, according to Douglas Meyer, Fitch’s leading life insurance analyst.

Charlie Lowrey, chairman and CEO of Prudential Financial, said during a call to investors in February that the insurer is considering selling “low-growth companies” like annuities and life insurance to free up $ 5 billion to $ 10 billion in capital, for example.

Private equity firms can harness the insurance pools, consumer insurance premiums, and other contract fees as a steady stream of reliable assets. If they have this “permanent capital” available, they won’t have to raise money in the market anytime soon, analysts said.

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

For example, KKR added $ 90 billion in assets under management with the acquisition of Global Atlantic.

And private equity managers could invest in a wider range of assets in return for higher returns for policyholders than traditional bonds, said Fitch’s Dunmore.

“We believe the higher returns, minus all fees we earn, while maintaining high credit quality, are particularly important to policyholders in this low-interest environment,” said Matt Anderson, a Blackstone spokesman.

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