Private equity firms put retiree annuities at higher risk but also more money

Privately funded insurance companies that owe retirees billions of dollars in annuity payments are taking additional risks with their investments, according to a new analysis from rating firm AM Best.

To offset this risk, however, these companies on average hold more cash than traditional insurers, and they have higher levels of capital, according to the report.

Seventy insurers controlled by more than two dozen different companies or investment groups hold a total of $ 255 billion in annuity reserves, according to the report. This represents about 13% of the industry’s annuity reserves. Since the 2008 financial crisis, investment firms have recovered dozens of insurance units and blocks of annuities. While many of the companies in Best’s analysis specialize in private equity, some identify themselves primarily as asset managers.

Exactly how these new management teams operate has been difficult to assess from the outside, as some data is not made public. The Best report sheds light on what happened.

The new owners mainly focused on “fixed annuities,” a product line from which some traditional life insurers have withdrawn. Those who opt out are largely reacting to ultra-low interest rates, which have made it difficult for some long-standing life insurance offerings to be profitable.

Private equity and other investment firms see an opportunity. Depending on the type of annuity they prefer, clients pay a lump sum and the insurer invests the money with the goal of earning more than it has to pay back in interest and principal. Private equity firms can allocate lump sums to categories of debt that they are familiar with and can charge fees as asset managers.

In particular, new entrants favored high-quality debt and private asset-backed securities, including secured loan bonds, Best said. Private placements accounted for 54% of aggregate bond portfolios of private equity insurers in 2020, compared to 37% for the industry as a whole, he said.

Private debt securities generally offer higher yields than ordinary publicly traded corporate bonds, Best said. It’s not as easily traded or transparent as government debt, which is where the extra risk comes in. In a downturn, it might be more difficult to offload than regular bonds.

Last year, newcomer insurers held more substandard debt: 6.7% of those holdings, compared to 6.2% for the industry as a whole.

At the same time, newcomer insurers account for an average of 5.9% of assets invested in cash and short-term securities, roughly double what the industry as a whole holds. And on average, they have better “risk-based capital” ratios, a key measure of the industry’s creditworthiness, Best said.

The different differences added to higher net investment returns for the group. In 2020, their overall net return was 4.62%, compared to 4.01% for the industry as a whole, Best said.

Many newcomers make more use of reinsurance when taking over an insurer, Best said. This is an arrangement whereby insurers transfer responsibility for certain customer payments to other insurers. Newcomers often use reinsurers affiliated with Bermuda, where they receive tax and other benefits, Best said.

Among the largest privately-backed insurers is Athene Holding Ltd.

, linked to the private equity and credit investment center Apollo Global Management Inc.

In one of the more recent transactions, Blackstone Group Inc.

agreed in January to buy a life insurance business from Allstate Corp.

Write to Leslie Scism at [email protected]

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