Advisers fear private equity’s reach into VAs

Editor’s note: This story has been updated with information about the sale of Voya Financial’s annuity business.

Financial advisers have expressed alarm over recent reports of insurers looking to offload large blocks of variable annuities to private investors.

Voya Financial Inc. announced Thursday it is selling tens of billions of dollars’ worth of variable and fixed annuities to three private-equity firms, Apollo Global Management, Crestview Partners and Reverence Capital Partners.

Voya will divest roughly $37 billion of variable annuity liabilities, as well as fixed and fixed indexed annuity policies worth around $19 billion in the deal — a total of $56 billion — as it exits the individual annuities business.

In early December, Hartford Financial Services Group announced plans to sell its Talcott Resolution unit, which houses roughly $48 billion worth of annuity contracts — the vast majority of which are variable annuities — to a group of six investors.

The Voya and Hartford deals involve “run off” variable annuity business, meaning the insurers are servicing existing contracts but aren’t selling new products. Observers say private-equity interest in variable annuities is a recent phenomenon.

‘A LITTLE SCARY’

“It’s a little scary for the adviser and the client,” Jessica Rorar, an investments planner at ValMark Financial Group, said. “You don’t really know what you’re getting into with these newer entities buying these older policies.”

ValMark clients have roughly $45 million of assets in Voya and Hartford annuities, less than 5% of the firm’s overall annuity block.

Insurers such as The Hartford carrying large blocks of variable annuities with income guarantees in the run-up to the 2008 financial crisis took a hit when the market tanked, leading many contracts to be worth less than their underlying guarantees. Overall variable annuity sales have been declining for more than five consecutive years.

The Hartford stopped selling individual annuities in 2012, seeking to focus instead on its property and casualty, group benefits and mutual funds businesses.

Voya’s run-off variable annuity business has also struggled, losing the firm hundreds of millions of dollars per year for several years running, according to company earnings reports. Voya’s stock was up around 9% as of 10:30 a.m. Thursday.

Which raises the question: What is private equity’s interest in the beleaguered businesses?

“When private equity is interested it’s because they think they see an opportunity no one else is seeing, or at least have the capital to put together a deal other people don’t,” said Jamie Hopkins, a professor of retirement income at The American College of Financial Services, who formerly worked on private-equity deals as an attorney.

Some advisers believe that “opportunity” may be to maximize profitability by pushing the limits of annuity contract terms, to the detriment of investors.

RAISE EXPENSES?

“I would be concerned because to the extent there are ways they could raise expenses or change features of the contract, chances are they will do so,” said Gregory Olsen, a partner at Lenox Advisors, some of whose clients own Voya and Hartford annuities.

Variable annuity contracts, for example, allow companies to increase costs for mortality and expense risk and features such as income riders, up to a maximum contract limit. The differential between an investor’s current charges and the maximum allowable cost can exceed well over 1% annually.

Similarly, after a fixed annuity runs its guarantee period — a period of five years, for example, during which an insurer pays a guaranteed rate — an insurer could revert to a lower rate. Similarly, insurers can tweak levers within indexed annuities, a subset of fixed annuity, such as caps, participation rates and spreads, to disadvantage consumers.

“Maybe Hartford doesn’t do that, maybe Voya doesn’t do that, because they’re worried about their name being on it and people complaining,” Mr. Olsen said. “[If] a private equity company buys it, rebrands it and calls it a different name, there’s really not much recourse.”

Further, some observers say there’s a loss of transparency that comes with shifting products from a public to a private company, and say it’s challenging to gauge how variable-annuity liabilities will affect private-equity firms that haven’t previously had such liabilities on their books.

Spokespeople for Apollo and the consortium of Hartford investors — Cornell Capital, Atlas Merchant Capital, TRB Advisors, Global Atlantic Financial Group, Pine Brook and J. Safra Group — declined to comment for this article. A Voya spokesman also declined comment, and a Hartford spokeswoman didn’t return a request for comment.

Some observers believe private equity’s intentions may not be bad news for investors, though.

“Private equity firms’ interest in acquiring life and fixed annuity businesses has been on the rise for a few years now,” said Meghan Neenan, managing director at Fitch Ratings. “The appeal emanates largely from PE firms being able to earn fees for their asset management capabilities, which includes sub-advising insurance assets, to the benefit of assets under management.”

Mr. Hopkins of the American College said investors may be executing these deals with an eye toward additional purchases in the future, in order to pool different blocks of VA business to boost economics and mitigate risk.

“A lot of times you try to look at multiple companies or deals you think you can pool together,” he said. “That’s a common strategy in the PE world.”