Update: Oct. 28, 2021 with Michael McRaith joining Brookfield
Oct. 14, 2021 — The fourth quarter is expected to maintain galloping pace of risk transfer deals as private equity firms expand their share of the life insurance market.
Fixed annuity blocks are capturing the attention of asset managers and analysts as buyers and sellers work out bid/ask prices and firms hire more deal-makers as life insurers seek to shed interest-rate sensitive long-term liability blocks.These blocks currently tend to be annuities and long-term care insurance blocks, although the latter, still heavily beleaguered by historically insufficient premiums despite occasional rate increases, are not finding buyers as readily.
The Federal Insurance Office at the U.S. Treasury is also paying attention to the exponential growth in the past few years to insurance liability risk transfer deals as insurers pivot to less capital-intensive products in this chronic low interest rate environment.
In its annual report delivered in late September, it pointed out that the cash and invested assets of PE-owned life insurers totaled more than $471 billion at the end of 2020 —that’s 11% of the U.S. life insurance industry total. FIO also estimated that the offshore reinsurance affiliates of these PE firms are over $137 billion.
FIO expressed concern that some potential PE firms investments in reduced liquidity vehicles or investments in highly market sensitive areas such as residential mortgages or collateralized loan obligations “could diminish the insurer’s ability to meet unexpected cash demands.” The Dodd Frank (2010) Act-created office also expressed a touch of concern about “reliance on offshore captive reinsurers” and complex affiliated investments jacking up the complexity of the group’s structure.
Still, this federal monitoring of the deals and the state insurance departments oversight of them should not dampen the market’s enthusiasm or state insurance regulator’s approvals for deals.
In fact, one person close to the PE interests noted that corporate lending has moved from regulated banks to private lenders who have better loan underwriting and oversight infrastructure, with investors expecting prudent use of capital.
So, whose next?
MET is one of the only companies that has expressed interest in doing risk transfer on the legacy book without having done a transaction to date.”
The analysts’ review concluded that the risk transfer opportunities for MetLife likely involved smaller block deals in either life insurance or fixed annuities.
On Oct. 8th in an analyst note, Evercore’s Thomas Gallagher and his team also identified, in addition to MetLife, Ameriprise Financial, Principal Financial Group and Equitable Holdings as potentially next-at-bat to make a deal to sell or reinsure their annuity liabilities, as the “risk transfer engine keeps revving.”
Recent headline deals include Lincoln Financial Group’s mid-September agreement with a subsidiary of Resolution Life, to reinsure about $9.4 billion of in-force executive benefit and universal life reserves, resulting in about y $1.2 billion of capital. It plans to use much of the capital to buy back shares. Brookfield Asset Management Reinsurance Partners Ltd. just announced it had closed its previously-announced deal to reinsure up to $10 billion of annuity products issued by American Equity Investment Life Insurance Co., split between $4 billion in-force and another $6 billion liabilities on a flow basis.
The banner year began with Allstate announcing it was selling off its life insurance unit to Blackstone for $2.8 billion. This followed 2020’s big summer splash when global investment firm’s KKR announced a deal to buy 60% of fixed annuity provider Global Atlantic, a deal valued at $4.7 billion, closing in early 2021. Based on preliminary financials at year-end 2020, the estimated value of its assets to be managed by KKR at closing was $90 billion, Global Atlantic stated in a Feb. 1 press release.
Although not a PE transaction, Prudential Financial did ink a deal with Fortitude Group Holdings, parent of Bermuda’s Fortitude Re, to sell a portion of its in-force legacy variable annuity block for $2.2 billion. Prudential explained in a Sept. 15 press release that the de-risking transaction for 17% of its annuity block will help it reduce exposure to traditional VAs with guaranteed living benefits and capital markets sensitivity.
To prepare for more expected deal-making, leading M&A firms are adding to their stable of insurance transactions and regulatory and legal experts. For example, Willkie Farr & Gallagher LLP announced Oct. 6th it had added Prakash “PK” Paran, as a partner in the Insurance Transactional and Regulatory Practice along with new expert reinsurance transaction counsel, adding to a slate of new partners added in April.
And on Oct. 28, Michael McRaith joined Brookfield as vice chair of its insurance solutions business, a newly created role, where he will focus on providing capital and investment solutions for insurance balance sheets and policyholders, with a likely eye now on fixed annuity block risk transfers. The former first director of the Federal Insurance Office at the U.S. Treasury Department worked on the Allstate deal when he was at Blackstone.
Expect more additions to well-known brands.