Close Close
ThinkAdvisor
Sen. Sherrod Brown, D-Ohio. (Photo: Kevin Dietsch/Bloomberg)

Life Health > Annuities > Fixed Annuities

NAIC Rejects Need for Federal Help With Private Equity-Owned Life Insurers

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Sherrod Brown is the chairman of the Senate Banking Committee.
  • He is interested in transfers of pension plan obligations to private-equity-owned life insurers.
  • The NAIC says life insurer guaranty association protection appears to be comparable to PBGC pension benefits protection.

A group for state insurance regulators has told Sen. Sherrod Brown that its members are well-equipped to oversee the private equity firms that now own many U.S. life insurers.

State regulators are not seeking help from Washington with monitoring those private equity firm owners, the officers of the National Association of Insurance Commissioners wrote in a public letter sent to Brown earlier this week.

Brown is the chairman of the U.S. Senate Banking, Housing and Urban Affairs Committee.

The NAIC officers told Brown that U.S. life insurers have been writing complicated products and using large, complicated investment strategies for some time.

“Our system has experience at assessing and understanding this dynamic through market highs and lows,” the regulators said. “State insurance regulators are fully capable of assessing and managing the risks of these insurers, and there is nothing PE firms add to the playing field that changes this fact.

What It Means

If your clients have life insurance policies, annuities, defined benefit pension plan benefits that they know they have, or defined benefit pension plan benefits that they forgot about, then they have an obvious stake in the jousting between Brown and state insurance regulators.

If your clients have none of those products, but they own or work for businesses that serve a high percentage of customers who depend on annuity and pension benefits to pay their bills, they also have a dog in this fight.

How well life insurers work could affect those businesses’ revenue streams.

Private Equity Firms

Life insurance policyholders themselves own some life insurers. Most policyholder-owned insurers are known as “mutual insurers.”

Small, family-owned companies own others.

Big, “publicly traded” companies — companies with many investors, which have to file many detailed with securities regulators — own about two dozen U.S. life insurers.

The list of possible owner types also includes a wide range of organizations based outside the United States, and “private equity” firms.

A private equity firm is a company that invests in opportunities that are not typically available to relatively small retail investors.

U.S. securities regulators classify a private equity firm and affiliated funds as large, sophisticated investors, that are well-positioned to get information from a company by calling up the executives of the company.

A life insurer or other company owned by a private equity firm may be able to stop posting the kinds of detailed quarterly and annual financial reports that a publicly traded life insurer sends the SEC.

For life insurers, finding a private equity firm owner has been especially appealing because new accounting rules are on track to change how life insurers report on the performance of products that often stay in place a long time, such as traditional life insurance policies, fixed annuities, long-term disability insurance policies and long-term care insurance policies.

The idea is that retail investors might be frightened by an accounting-driven increase in a life insurer’s apparent performance volatility, but that private equity owners will blame the accounting rules and stick with their investment in a life insurer affected by the new rules.

The Brown Query

Consumer groups, patient groups and others have watched the rise of private equity owners in many market sectors and wondered how well private equity owners will run the companies.

The NAIC itself has been watching the rise of private equity owners in the life and annuity insurance sector closely.

In March, Brown sent a letter asking about the issue to the NAIC and to Steven Seitz, director of the U.S. Treasury Department’s Federal Insurance Office. A copy of the Seitz response is not yet available.

Brown said that he is concerned about the rise of private equity ownership because many pension plan sponsors have been transferring pension risk to life insurers, by buying large group annuities.

The deals shift responsibility for backing the obligations to the life insurers, and to state life insurance guaranty associations, and away from the Pension Benefit Guaranty Corp.

Solvent life and health insurers meet state guaranty association obligations to the customers of failed insurers by making assessment payments into the funds when insurers fail.

Pension plan sponsors are supposed to pay for PBGC insurance for defined benefit pension benefits by sending payments to the PBGC.

“In cases of pension risk transfer arrangements, what is the impact on protections for pension plan beneficiaries if plans are terminated and replace with lump-sum payouts or annuity contracts?” Brown asked in his letter.

Brown also asked about how the shift away from public company ownership of some life insurers might affect life insurer investment and stability transparency.

The NAIC’s Response

The officers who signed the NAIC response are Dean Cameron, the Idaho insurance director and NAIC president, and the NAIC’s president-elect, vice president, secretary-treasurer and CEO.

Cameron and other NAIC officers noted that state insurance regulators get detailed lists of each investment in an insurer’s investment portfolio, and that regulators and insurers perform many detailed financial analyses to monitor insurer solvency.

Regulators also can see detailed information about pension risk transfers, and they know, for example, that only three of the 32 insurance groups engaged in the pension risk transfer business have private equity firm owners, Cameron and colleagues wrote.

The NAIC officers contended that state guaranty association, or GA, backing for group annuities is comparable to PBGC backing for pension plans.

“Like the PBGC the GAs are not directly funded by tax dollars and are not backed by any state’s full faith and credit,” the NAIC officers said.

But an outside analysis commissioned by the guaranty associations’ group, the National Organization of Life and Health Insurance Guaranty Associations, found that both the guaranty association and PBGC systems provide strong safety nets, according to an NAIC summary of the outside analysts’ findings.

Pictured: Sen. Sherrod Brown, D-Ohio. (Photo: Kevin Dietsch/Bloomberg)