Private-equity firms' appetite for annuity business and takeover targets is starting to worry debt analysts.
Companies like Guggenheim Partners LLC, Athene Holding Ltd. and Harbinger Capital Partners have consumed a veritable buffet of annuity businesses, snapping up bits and pieces as life insurers back away from fixed and variable annuities.
The buyers are finding discounts as skittish carriers back away from costly hedging amid low interest rates and struggle with the prospect of higher capital requirements. But the transactions may not be so great for the insurance companies, according to research from Moody's Investors
“Generally, they have a higher risk tolerance and are more willing to take investment risks,” said Scott Robinson, a senior vice president at Moody's and a co-author of the report.
Analysts pointed to four areas of concern: Private-equity firms tend to be financially motivated rather than strategically motivated. They also look for intermediate-term exit strategies rather than staying for the long term, according to Weigang Bo, an associate analyst at Moody's.
He added that private-equity buyers seek to extract dividends from the insurance companies they buy as a return on their investment. Because they are more aggressive on their investment and capital management strategies, they rely on managers to squeeze out additional returns from riskier asset classes, such as residential mortgage-backed securities.
Though Moody's views the sale of a block of business as a credit positive event for sellers, the outright sale of a life insurance company to a private-equity firm is a negative event.
“Ownership by an alternative-investment-management firm could weaken the insurer's financial flexibility and capital adequacy through an aggressive dividend policy,” the analysts wrote in the Moody's report. “In a stress scenario, AIM firms may have a limited ability to extend meaningful financial and strategic support to the insurer.”
Most recently, Athene acquired Aviva PLC's U.S. life and annuity business, while a Guggenheim affiliate bought up Sun Life Financial Inc.'s U.S. annuity block in December. Other notable acquisitions in recent years include Guggenheim's purchase of Security Benefit Life Insurance Co. and EquiTrust Life Insurance Co., and Harbinger's purchase of Fidelity & Guaranty Life Insurance Co.
Because these firms have a short operating history, it could be a challenge for an acquired life insurer to maintain its new-product sales, as the business is credit- sensitive for clients and agents alike, according to analysts.
Douglas Meyer, a managing director at Fitch Ratings Inc., noted that when evaluating insurers owned by private-equity firms, Fitch weighs the firms' short turnaround time.
“We want to understand what they're doing in terms of the financial management of the company and its ownership,” he said. “Certainly, the private-equity firms have a specific investment horizon and we expect they will fully monetize their investment at some point down the road.”