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Assemblymember Ken Cooley, D-Calif. (Photo: Allison Bell/ALM)

Life Health > Annuities > Fixed Annuities

Some State Lawmakers Troubled by Private Equity's Growing Life & Annuity Stake

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What You Need to Know

  • Private equity funds and similar types of investors controlled or are in the process of acquiring control of, about $620 billion in U.S. life and annuity assets.
  • A Johns Hopkins professor who once ran a private equity fund said the funds might take a little too much risk and enjoy too much secrecy.
  • A reporter who has covered the funds noted that some have rescued life insurers that ran into problems while owned by traditional owners.

State lawmakers are wondering what they should think about the growing role of private equity fund owners in the life insurance and annuity sector.

Members of the National Council of Insurance Legislators, a group for state lawmakers with an interest in insurance, recently held a well-attended session on the private equity ownership issues today, at an NCOIL meeting in Jersey City, New Jersey.

McKinsey consultants reported in February that private equity funds and similar types of investors controlled, or were in the process of acquiring control over, about $620 billion in U.S. life and annuity assets, or 12% of U.S. life and annuity assets, according to Kentucky state Rep. Joe Fischer, a Republican, who presided over the private equity fund session.

NCOIL members and others have different views about whether private equity fund ownership is any different than any other form of ownership, Fischer said. Some noted that private equity funds had been helpful to insurers in their states.

California Assemblymember Ken Cooley, a Democrat who serves as NCOIL’s president, recalled watching what had once been a little-noticed investment strategy — building up a big portfolio of below-investment-grade bonds — kill California’s largest life insurer, Executive Life, in 1991.

Focusing on below-investment-grade bonds “looked like a good option, until it was not,” Cooley said.

Now, Cooley said, state lawmakers have to look at the private equity fund ownership issue carefully, to make sure they understand it and avoid surprises.

“This puts us as lawmakers all front and center,” Cooley said.

Connecticut state Rep. Stephen Meskers, a Democrat, said he wants to review allegations that the private equity fund deals might be moving blocks of annuity and long-term care insurance business from strong insurers to less-credible insurers, and that the less-credible insurers might be more likely to fail.

He suggested that the deals might surprise the customers who bought the annuities and LTCI policies involved in the deals.

“I’m not investing in a venture capital fund when I buy an annuity,” Meskers said.

A Primer on Private Equity Funds

Jeffrey Hooke, a Johns Hopkins business school lecturer who was once the director of a $5 billion emerging markets private equity fund, gave NCOIL members a briefing on private equity fund basics.

Hooke told attendees that a private equity fund is an investment fund that invests in companies that are not subject to the SEC reporting requirements and other requirements that apply to companies that have shares of stock in the hands of large numbers of ordinary outside investors.

The managers of a private equity fund usually lock the investors’ money in for 10 years, and they typically try to sell and collect profits within about six or seven years, he said.

Hooke said a private equity fund is similar to a hedge fund but tends to differ in several ways.

A hedge fund will invest in a higher percentage of publicly traded securities and other liquid investments, and return investors’ money upon request within about six months, Hooke said.

Newcomers May Lack ‘Staying Power’

Leslie Scism, a Wall Street Journal reporter who has covered the growth of private equity fund investments in insurers, said one concern is that consumers who thought they were working with a strong, well-known insurer suddenly find that a company they have not heard of is providing their insurance policy or annuity.

“Some of these new owners don’t have staying power,” she added.

But private equity fund owners were among the investment fund owners that helped rescue life insurers that ran into problems during the 2007-2009 Great Recession, and many of these owners seem to be taking their role as owners of insurance companies seriously, Scism said.

Those companies have their own reputation to maintain, Scism said.

She suggested that the best strategy might be for regulators to improve oversight of all types of owners, and not to single out one type of owner for extra attention.

State Lawmakers’ Position

One challenge for state lawmakers is that they often come into complicated insurance policy discussions with fewer information resources than other players.

Some state insurance commissioners are elected, but most are appointed by their states’ governors.

State insurance regulators often oversee large amounts of insurance premium tax revenue, and they have research teams in their own departments and at the National Association of Insurance Commissioners.

Regulators, insurance company executives and insurance lobbyists may get to focus full-time on insurance-related issues.

State lawmakers, in contrast, may come to office with little professional experience with insurance.

Cooley said during an NCOIL meeting general session before the private equity fund session that NCOIL can help equip members with the information they need to make their voices heard in their state legislatures. This would include focused briefings on the issues, along with access to the group’s regular in-person meetings and online resources.

After the in-person meeting in Jersey City, “you’re going to be sort of 10 feet tall,” Cooley said.

He said state lawmakers tend to pay more attention when they run into colleagues who clearly know more about the issues being discussed.

After state lawmakers attend NCOIL meetings, “your colleagues will start to listen to you,” Cooley said.

NCOIL is trying to encourage more state lawmakers to participate by offering meeting scholarships for first-time attendees.

Pictured: California Assemblymember Ken Cooley, the president of NCOIL, told members at a meeting in Jersey City, New Jersey, that the group can equip with them with the knowledge to get more attention from legislator colleagues. (Photo: Allison Bell/ALM)