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Trendspotter: Life Insurer Ownership Is Changing — a Lot

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What You Need to Know

  • Low interest rates have filled life insurers’ bond portfolios with ice.
  • Multiline insurers are splitting.
  • Longtime life and annuity specialists are selling or changing.

A relatively small number of companies seem to be gobbling up the life insurers.

Many multiline insurers have been splitting off their life and annuity arms. Some life and annuity issuers that started out when stagecoaches were hot are now trying to find buyers, focus on selling certain types of life and annuity products, or turn themselves into issuers of dental insurance and Medicare plans.

Some of the buyers have been policyholder-owned mutual life insurers. Others have been publicly traded property and casualty insurers. But the typical buyer has been a relatively new company backed by a private equity (PE) firm based in Bermuda.

The Capital Markets Bureau, an arm of the National Association of Insurance Commissioners, reported in July that PE firms had acquired 117 of the 4,530 U.S. insurers as of the end of 2020, up from 89 of the 4,482 U.S. insurers the NAIC was tracking at the end of 2019.

Regulators and rating analysts have suggested that, in many ways, the private-equity backed firms appear to be similar to, or even superior to, other life insurers. The PE-owned insurers had about 74% of their cash and invested assets in bonds at the end of 2020, and about 95% of the bonds in the portfolios of those PE-owned insurers were in the NAIC’s top two quality categories, according to the Capital Markets Bureau.

All of the ownership changes have certainly gotten industry players’ attention.

Observers are wondering why life and annuity issuers are going through all of these changes, and what the changes mean for the customers, investors, insurers’ employees, and insurance agents, brokers and advisors.

The Drivers

  • The effects of low interest rates on U.S. life insurers’ trillions of dollars in bonds.
  • Intensifying efforts by the managers of the U.S. generally accepted accounting principles rules to put projected changes in companies’ assets and liabilities in current earnings.
  • Variations in how regulators in different jurisdictions see investment risk, accounting rules and disclosure requirements.

The Buzz

Nathan Gemmiti, CEO, Sunset Life Insurance Co.:

The insurance industry has been going through a significant change. Many “old-line” insurers have very large blocks of in-force fixed annuity business with high minimum guaranteed rates, which are causing a drag on their earnings due to the low-interest-rate environment and a resulting difficulty to earn spread income. They are faced with a choice: They can continue to allow the drag on earnings to happen, shift their investments to higher-yielding assets and accept the resulting increased risk and capital charges, or they can divest the business.

At the same time, market entrants with investment company affiliations are bringing fresh capital and investment capabilities to the sector without legacy issues. Even if a new entrant is buying an in-force block, the policy features can be priced in to the acquisition.

In addition, where traditional insurers have historically been allocators to different third-party asset strategies, having an investment company affiliation allows an insurer to have direct insight into a diverse set of specific assets. It also creates a nice alignment of interests, because the insurer is investing in high-conviction assets originated by an affiliate, rather than simply engaging with a third-party service provider.

More on this topic

Clients should know that this business model allows the legacy insurers to divest unwanted business and become financially healthier. At the same time, it is creating a new group of insurers that are developing innovative retirement products and can offer good, risk-adjusted returns due to their investment management capabilities.

Larry Rybka, president and CEO, Valmark Financial Group

The press of low interest rates impacts every company of every kind — stock-, mutual- or PE-owned. Products sold in a period of higher interest rates now require additional reserves be set aside to back them. For the publicly held companies, upcoming changes in GAAP accounting rules just make this a more imminent threat.

From a policyholder perspective, I see little if any good that can come out of this. It almost certainly means that policyholders will be squeezed on non-guaranteed elements, such as credited rates, caps, cost of insurance.

Generally, the acquiring companies are run on a much smaller capital base, with more opaque and complex ownership structures, than the public companies that sold the blocks. This means the promises to policyholders are less secure.

We are providing as much information as we can get, but it is hard. On [one company’s] transaction specifically, we took a position opposing the transaction and then were able to negotiate some additional protections for policyholders. Many consumers have no idea that ownership and financial rating changed dramatically.

In most states there is no notice requirement. There are some policyholders who purchased a … policy when the company was owned by ING and it had a AAA rating, and now, after a series of ownership changes, the policy is the in hands of a company with an A rating.

Bill Broich, co-founder of Annuity.com:

If you look at the bigger overall picture, the overtaking of our industry by large PE firms means a new and full focus on the bottom line.

All that will matter is profit. Profit will drive stock valuation.

We will see a greater evolution toward products that offer fewer guarantees and more risk borne by the annuity owner. We will also see social media as the sales vehicle carrier. Many things will be offered only to gain attention for the product by artificial intelligence. This will move the annuity buying experience away from older, proven, more traditional relationships. The agent will mean less to the annuity provider, and will be replaced by social media.

You will see a far greater emphasis on rates of return and direct selling, and far less need for the actual salesperson.

I think the PE adventure will severely damage our industry. As the PE firms insist on changing the sales process, the new sales leaders will be the algorithms.

Profit and profit estimates are and will be the name of the game; we already see it in many old-line insurance companies beginning a whole new chapter of de-risking their product line.