Private equity comes with dollars but also some questions

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If you think there seems to be a lot of private equity behind the annuity industry these days, you’re not mistaken.

For example, in the fourth quarter of 2019, just before the pandemic hit, private equity firms accounted for 26.7% of fixed-index annuity sales, according to data from Wink Inc. In the third quarter of 2021, this percentage rose to 41% of the $17.3 billion in sales.

Observers say that’s either the best or the worst thing that can happen to the life insurance and annuity industry – sometimes the same person says both.

Private equity firms have helped large legacy companies by buying their closed business blocks, such as Principal Financial selling its fixed annuity and universal life business to investor Sixth Street in a recent $25 billion deal. The money will help Principal move into more profitable businesses, such as group benefits.

The past year has seen a flurry of mergers and acquisitions, including huge deals such as Apollo combining with Athene and Blackstone to purchase a 9.9% share of the life and pensions business of ‘AIG as part of a longer term ongoing relationship.

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The main benefit for private equity firms is the capital they can invest more freely without the oversight and complications that public companies face. Even without pushing the investment envelope, business blocks come with a decent spread between revenue and cost, McKinsey said in a recent article, “Why Private Equity Sees Life and Annuities as an attractive form of permanent capital”.

https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of- permanent-capital

“The balance sheets of life insurance and annuity companies are well stocked with assets (to match liabilities for future payouts and claims), but until payout, those assets must be invested to generate returns,” according to the report. item. “And in many cases, the cost of managing liabilities is significantly lower than the potential return on investments. The spread represents an attractive margin.

On top of that margin, using what the authors called the “value creation playbook,” private equity owners can generate internal rates of return of 10% to 14%. They can do this by moving money into higher risk, higher yielding assets.

“An analysis found that they generated an investment return 62 basis points (bps) above 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 loan-backed bonds), and more than half of their investments were private loans (up from 37 % for sector).”

While admiring the returns, the high-risk part of the proposal worries seasoned observers such as Sheryl Moore, CEO of Wink Inc., a data analytics company. Securitized debt and similar investments remind him of the risky instruments that helped pave the way for the financial meltdown of 2008.

Moore added that she was not an expert on these financial instruments, but that she had observed risky behavior that accelerated the growth of certain companies. She herself had to save her own pension when a company went into receivership and “lost” her contract.

Although most private equity firms can be considered trustworthy handlers of contract owners’ money, the opacity of private equity hides the bad behavior of some outliers. A recent example was Greg Lindberg, a North Carolina financier who acquired Colorado Bankers Life as part of the Global Bankers Insurance Group. Lindberg is currently serving a seven-year prison sentence for attempting to bribe the North Carolina Insurance Commissioner. The companies are in receivership.

Lindberg used insurance companies as a piggy bank for other businesses, according to records gathered by The Wall Street Journal. Lindberg redirected $2 billion to buy businesses, lavish estates and yachts, among other things, the WSJ found.

https://www.wsj.com/articles/financier-who-amassed-insurance-firms-diverted-2-billion-into-his-private-empire-11551367856

“The scale of Mr. Lindberg’s use of insurance assets to invest in his own businesses has little precedent in 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 part of a wave of financiers who have taken over life insurance companies in recent years, saying they can do better than traditional owners to invest the vast assets of insurers’ books in an environment of low interest rates Some members of this new ownership class have deployed unusual financial structures and complex investments, defying state regulators who have struggled to keep up with the changing environment.

The Lindberg case is extreme, but regulators and evaluators are watching more closely. In December, AM Best announced that it was placing Salt Lake City annuity company SILAC Insurance under review because “the company’s capital has been significantly stretched by rapid growth in sales and an increase sub-investment grade bonds in its general account investment portfolio”.

SILAC’s CEO is Stephen Hilbert, who was founder and CEO of Conseco, an insurance conglomerate that went bankrupt in 2002, two years after being “retired” from the business following severe losses. Conseco becomes CNO Financial Group.

http://www.josephmbelth.com/2016/01/no-139-stephen-hilbert-returns-to.html

Conning sees himself as having a balanced view of private equity. While acknowledging that private equity firms have been able to relieve legacy companies of their business blocks, Conning life annuity researcher Scott Hawkins also said in a recent webinar that corporate opacity is disconcerting.

“When you look at these companies, their structure can be opaque,” Hawkins said. “Who owns whom? Where is the real risk? So trying to analyze that can be difficult, and it’s a risk companies need to think about.

Hawkins added that these types of reinsurance are not new, although the investment strategies have not been tested for a long time.

“There is a certain degree of investment risk, how are they going to do it in the event of a market downturn?” Hawkins said. “So as they begin to grasp the risks of individual life, their forte is investment management, what is their ability to understand and manage different types of risk, mortality risk, for example. There is some governance risk here.

Steven A. Morelli is editor for InsuranceNewsNet. He has over 25 years of experience as a journalist and editor of newspapers and magazines. He was also vice-president of communications for an association of insurance agents. Steve can be reached at [email protected].

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