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Private equity firms are buying up insurers — and the policies they hold — at a feverish pace.
Some groups, namely financial advisors, fear the trend may be bad for consumers who own annuity and life insurance contracts.
Critics are concerned the buyers will wring profits from customers — via higher costs — to boost returns for their investors. Consumers may have owned such insurance for years and depend 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 signifies its ability to pay future benefits, advisors cautioned.
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“There’s nothing good in this for the policyholder,” 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 bigger buyers are well-capitalized firms and not all deals are inherently bad, according to some analysts. Policyholders may benefit from potentially higher investment returns in an environment of low interest rates.
“I don’t know if I’d say [they’re] unfounded,” Dafina Dunmore, lead analyst for alternative investment managers at Fitch Ratings, said of the fears. “I’d say they’re overplayed.”
The pace of acquisitions has accelerated since 2014, according to Refinitiv, which tracks financial data.
There were 191 private-equity-backed insurance deals last year in the U.S., beating the prior record of 154 set in 2019.
Buyers paid $12.1 billion so far in 2021 for the deals — eclipsing the $9.7 billion record set in full-year 2018, according to Refinitiv.
“By definition, [private equity’s] mandate is not the policyholders,” said Gregory Olsen, a certified financial planner and partner at Lenox Advisors. “It’s to make as much money for their investors [as possible].”
Annuity and life insurance policies carry various annual fees for consumers. Those fees can be raised up to a certain cap guaranteed by the contract.
Advisors are concerned private equity buyers will raise those various fees to their maximum values. The result may be eroded investment earnings in a variable annuity or higher annual premiums required to keep a life insurance policy, for example.
“I’d watch closely on the expenses,” Olsen said.
Worried or adversely affected consumers may be able to exchange their annuity or life insurance for another.
However, such transfers are complicated, advisors said. Consumers may inadvertently trigger penalties and fees, or may be better suited staying in their current contract even with higher annual fees, they said.
Types of deals
Acquisitions are often complicated and can take different structures, which have different implications for consumers.
For example, a buyer may purchase a majority stake in an insurer or buy it outright.
In February, KKR bought a 60% stake in insurer Global Atlantic for more than $4 billion. More than 2 million people have fixed annuities, life insurance 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 trying to sell the other $5 billion currently held by Allstate Life Insurance Company of New York, it said in the deal announcement.)
In these types of deals, private-equity firms may have an incentive to avoid raising costs and risking reputational damage that may cost them future business.
Global Atlantic, for example, hasn’t changed policyholder fees on any existing policies since the ownership change, according to a KKR spokesperson.
“As owner, KKR has a vested interest in the long-term success of Global Atlantic which can only be achieved through strong, trusted relationships with policyholders and their financial advisors and by continuing to offer competitive products,” according to an e-mailed statement.
Other recent deals have involved legacy business lines closed to new customers. These types of transactions may be a bit shakier, since that same incentive doesn’t exist, advisors said.
Sixth Street Partners announced a deal to buy Talcott Resolution Life Insurance Company, which owns a large block of legacy insurance business, in January. Talcott manages over $90 billion for roughly 900,000 customers, including nearly 600,000 annuity contract holders.
The current Talcott owners are a group of private-equity firms that had bought Hartford Financial Services Group’s annuity business, consisting largely of legacy variable annuity contracts, in 2018.
Similarly, in 2018, Voya Financial divested more than $50 billion of legacy fixed and variable annuities to Apollo Global Management, Crestview Partners and Reverence Capital Partners. The buyers rebranded the segment as Venerable Insurance.
Allison Proud, a spokeswoman for Venerable, declined to comment. Allison Lang, a spokeswoman for Talcott, also declined comment.
Low interest rates
Insurers have largely sold off insurance business due to persistently low interest rates since the Great Recession, analysts said.
Low interest rates equate to lower returns on bonds that underpin their insurance portfolios. That, in turn, makes it harder to keep the required cash on hand to pay promised insurance benefits.
Selling a block of business lets insurers free up capital to invest elsewhere, according to Douglas Meyer, lead life insurance analyst at Fitch.
Charlie Lowrey, chairman and CEO of Prudential Financial, said in February during an investor call that the insurer is looking at a potential sale of “low-growth businesses” like annuities and life insurance to free up $5 billion to $10 billion of capital, for example.
Private equity firms can leverage the insurance pools, and consumers’ insurance premiums and other contract fees, as a steady stream of reliable assets. Having that “permanent capital” at their disposal means they won’t have to raise money in the market as readily, analysts said.
“The P/E angle is really to gather assets that are ‘sticky,'” David Havens, a global insurance analyst at Imperial Capital, said in an e-mail.
KKR, for example, added $90 billion of assets under management with its purchase of Global Atlantic.
And private-equity managers may be invested across a broader range of assets, and in turn earn higher returns for policyholders beyond traditional bonds, said Dunmore of Fitch.
“We believe the higher returns net of all fees we’ve produced — while maintaining strong credit quality — are especially vital to policyholders in this low-interest-rate environment,” according to Matt Anderson, a Blackstone spokesman.