Life Insurance & Annuities: where is your insurance carrier investing their assets?

May 31, 2023

(3 minute read) In 2022 insurance industry watchdog A.M. Best calculated that private equity (PE) firms had accrued 10.8% of the life and annuities industry, assets worth $882 BILLION.  Just twelve years earlier they showed that PE firms had acquired 1.2% of the life and annuity industry, or, $67.4 BILLION in assets.  In April 2023 THE WALL STREET JOURNAL reported that life insurers who sold portions of their business to PE firms “are missing out on some of the highest interest rates since the 2008 financial crisis.” What does this mean to the industry? What does this mean to a policyholder? 

The U.S. Senate Banking Committee believes there needs to be more transparency into the valuation of these assets held by PE firms, in real times. As of now this is a relatively foggy area and not the sorts of fixed-income assets we have all grown up knowing (or thinking we knew) assets that trade openly on exchanges. Where their prices can be observed by all, on a minute-to-minute basis. Not true when a PE firm invests.

Life insurance and annuities can be retirement money in the form of these insurance products funding retirement of all sorts of people. Here’s another fact about how this works: Ownership is critical in a life insurer’s present and future performance. Struggling PE firms can be bailed out with insurance assets (recent returns were negative 6% for PE firms in 2022).

Without saying there is an issue right now, I do think the current uncertainty we see in the financial markets following the collapse of SVB and Signature Bank and the emergency rescue of Credit Suisse should ring a bell at the National Association of Insurance Commissioners (NAIC).Everything is great until it isn’t”    – Ram Menon, Partner, Head of Global Insurance Deal  Advisory, KMPG (per interview with LEADER’S EDGE MAGAZINE 6-23).

Why Is This So Appealing to PE firms?

One reason experts believe this is now “a thing”, selling portions of assets to PE firms, is to get out from under the liabilities in excess of what they were earning on their investment portfolios, which in-turn frees-up capital for them to write more business at a much lower rate. This is capital they would have otherwise not have access to.

As we realize there are Stock, Mutual and Fraternal insurance companies. This is a Stock insurance company play. Allstate, MetLife, The Hartford, Principal Financial, Genworth and some others have found this appealing, selling their individual life insurance business to PE firms. This is one way to find efficient capital solutions for these companies. Remember, it wasn’t too long ago that we were living through some of the lowest interest rates in the history of interest rates. Some insurers struggled to keep up. Causing a search for alternative solutions offering better yield.

What this move offers a more traditional investing insurance company is the opportunity to benefit from more sophisticated assets generated in the private sector as compared to what was available in the corporate bonds and treasury’s marketplace.  Key phrase here, PRIVATE SECTOR.

The “Math”

From 2008 through 2021 some insurers struggled to manage relatively expensive long-dated liabilities, in the midst of declining returns on assets, especially fixed income. On the other-hand, the complex private-debt-like products created by PE firms offered a fantastic solution, higher rates.

Summary & Conclusions As of June 2023

Private Equity firms aren’t ‘bad’. Involving them in investing in a traditionally lead investment environment within life insurance and annuity companies opens up questions and unknowns. Between 2015 and 2019 nearly two-thirds of retail companies that went into bankruptcy were owned by private equity firms.  “A major concern here is if this were to happen to the top-50 insurers either owned or controlled by more than two dozen investment firms policy holders and annuitants might receive less than what was expected from their life insurance and annuity policies” says A.M. Best.

A question for you: How is your  stock insurance company investing their assets today? What percentage of these assets are invested through a private equity firm?  It’s a good time to do some homework and think about what this means to you and your financial strategies.

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