Low interest rates and new accounting rules may continue to push publicly traded life insurers to sell variable annuity blocks to private capital companies in 2021.
Bob Garofalo, a senior credit officer at Moody’s Investors Service, and other Moody’s analysts make that prediction in a new report on the state of mergers and acquisitions in the U.S. life and annuity markets.
- A copy of the Moody’s report is available, behind a log-in wall, here.
- An article about one new set of mark-to-market accounting rules for insurers is available here.
Many life insurers turned away from M&A activity earlier this year, to focus on building capital, increasing liquidity and shoring up operations, the Moody’s analysts write.
Now, “as the economy recovers, we are starting to see a wave of deals, and we expect a high level of M&A activity will continue into 2021,” the Moody’s analysts write.
Life companies may want to free up capital by selling “non-core” operations, buying insurance technology companies, and increasing their focus on their core operations, or on products that are less vulnerable to low interest rates, the analysts say.
New accounting rules now require or encourage big, publicly traded life insurers to include adjustments for the estimated value of a variety of assets and liabilities in their quarterly and annual earnings.
Many life insurers for example, now routinely report quarterly net earnings and quarterly net losses over $1 billion, because of “mark to market” accounting rules for the hedging arrangements that life insurers use to pass interest rate, stock price and currency exchange rate risks to other financial services companies.
Many blocks of business with apparent earnings volatility, due to mark-to-market accounting rules, generate strong, predictable cash flow, the Moody’s analysts write.
Many private capital companies face less concern about the effects of mark-to-market accounting on their earnings because they are privately held, the analysts say.
“This reduced transparency allows the firms to focus on long-term economic value, and has helped to drive an increased appetite for long-duration blocks with volatile earnings, such as variable annuity [blocks],” the analysts say.