Analysts wary of PE annuities

Private-equity firms' appetite for insurance companies and their annuity businesses is starting to worry debt analysts.

Companies such as Athene Holding Ltd., Guggenheim Partners LLC and Harbinger Capital Partners have consumed a veritable buffet of annuity businesses. They are snapping up bits and pieces as life insurers back away from fixed and variable annuities because of struggles with costly hedging amid low interest rates and 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 Service.

“Generally, [PE firms] have a higher risk tolerance and are more willing to take investment risks,” said Scott Robinson, a senior vice president at Moody's and co-author of the report.

Analysts point to four areas of concern. PE firms tend to be financially rather than strategically motivated. They also look for intermediate-term exit strategies rather than staying for the long term, said Weigang Bo, an associate analyst at Moody's.

EXTRACT DIVIDENDS

He added that PE buyers seek to extract dividends from the insurance companies they buy. And because they are more aggressive on their investment and capital management strategies, they rely on managers to squeeze additional returns from riskier asset classes, such as residential mortgage-backed securities.

Although 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 PE 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.”

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 last month.

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.

Douglas Meyer, a managing director at Fitch Ratings Inc., noted that when evaluating insurers owned by PE firms, Fitch weighs the firms' short turnaround time.

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