Private equity has been an encroaching player in the insurance market over the past several years, and its interest recently became clear in one area: indexed annuities.
Over the past five quarters, annuity providers owned by private equity firms have accounted for more than 40% of all indexed annuity sales, according to data provided by Moore Market Intelligence. Such sales were more than $6.8 billion during the second quarter, or about 41% of all indexed annuity sales industrywide, at $16.7 billion.
In some cases, private equity firms have been entering the market or building on their presence by buying up old books of business that insurers no longer want.
That insurers are keen to offload some of these older products is no surprise -- the rates promised to contract holders are sometimes more generous than those available today. Those lines might not be highly profitable for insurance companies.
But for private equity firms, that is not necessarily the case, said Sheryl Moore, CEO of Moore Market Intelligence.
“The mentality is some of these private-equity firms have more sophisticated investors” and see higher margins than insurers outside of the private-equity world, she said. “They are specifically interested in the indexed annuity market.”
It’s a strategy that Kerry Pechter, publisher of The Retirement Income Journal, has called “The Bermuda Triangle.” In a piece outlining the strategy last year, Pechter noted that private-equity firms use captive offshore reinsurers to back the old books of business, mostly fixed annuity assets. That has allowed U.S.-based firms to have more capital to invest more aggressively than in traditional fixed-income vehicles like 10-year Treasuries.
The firm that pioneered that strategy, Athene, is backed by Apollo Global Management, which acquired the business in 2013, when it was known as Aviva Life, Pechter noted.
Athene, which has since gone public, is merging this year with Apollo, the companies disclosed in March. The annuities provider is the biggest private-equity-backed firm by indexed annuity sales, having sold roughly $1.7 billion in the products during the second quarter, representing about 10% of industry-wide sales, the Moore Market Intelligence data show. A spokesperson for Apollo wrote in an email that the appropriate staff who could comment on the business’ interest in indexed annuities were unavailable.
Other private-equity-owned firms with big sales numbers for fixed indexed annuities during the second quarter were Fidelity & Guaranty Life ($1.1 billion), Forethought Life ($901 million), SILAC Insurance Company ($901 million), Security Benefit Life ($793 million), and Guggenheim Partners, which owns Guggenheim Life & Annuity and Delaware Life ($432 million), according to Moore Market Intelligence.
Earlier this year, KKR closed its purchase of Global Atlantic’s outstanding shares, owning 60% of that firm, which itself owns Forethought.
A report a year ago from Cerulli Associates found that insurers were concerned about the prolonged low-interest-rate environment, with that factor fueling the volume of mergers and acquisitions in the market. By partnering with private-equity firms, insurers have more access to sophisticated investments that can be used in their general accounts. And private equity firms get a reliable, long-term source of capital.
Fidelity & Guaranty Life, or F&G, was acquired last year by Fidelity National Financial.
During the firm’s second-quarter earnings call, president Mike Nolan cited F&G setting “records for its retail annuity sales, while expanding into new institutional channels, further validating our decision to acquire the company just over one year ago.”
“We are building a company designed to deliver more stable earnings and cash flow as market conditions change and interest rates eventually rise and pressure our title business, and we can already see the early signs of our success.”
F&G reported total annuity sales of $1.6 billion for the second quarter, an 80% increase from the second quarter of 2020.
The second quarter fared well for annuity sales in general, with the industry bringing in nearly $68 billion across all products, up 39% from the $48.6 billion seen during the second quarter of 2020, according to figures from the Life Insurance Marketing and Research Association's Secure Retirement Institute. Fixed-indexed annuity sales were up by 28% over the second quarter of 2020. Through 2021, the Secure Retirement Institute projects sales of those products to ramp up by 5% compared to 2020.
A separate trend -- one that has some implications for private-equity firms in the annuities business -- is the proliferation of proprietary indices that are used to credit accounts.
There are 115 “hybrid” indices used for the products, and some include fees, Moore said. Not all fixed indexed annuities use such indices, and the indices themselves are not necessarily bad.
“Insurance salespeople need to make sure they understand the indexes on the annuities they are selling in order to protect themselves and their business,” Moore said.
Source: Moore Market Intelligence
The use of such indices can be a good deal for the annuity providers, as they can get favorable pricing from the banks they work with, which is part of the reason in-house indices have become so popular, Moore said.
“The insurance companies are getting Sam’s Club-style pricing for their options on this,” she said.
Despite the volume of indices used within the products, “there is much less differentiation in terms of the actual strategies,” said Tamiko Toland, director of retirement markets for Cannex.
“We tend to focus on the index performance, but the insurer also needs to buy options to support the [fixed indexed annuity] and crediting method. Whether a bank can issue the particular options and how efficiently it can do that do affect the ultimate yield.”
Since fixed indexed annuities are relatively basic financial instruments, some might ask whether it would be more advantageous to take a do-it-yourself approach, reproducing a product by buying zero-coupon bonds and investing in options, Toland said.
“The issue is whether an individual can do both of these things efficiently and effectively,” she said. “With higher volumes and dedicated teams, any institution is able to have better access and prices. This is especially true of novel indices.”
Insurers should have no motivation to sell products with poorly performing indices, she said.
“A client is more likely to want to move that money into a different annuity or a different product altogether,” Toland said. “The insurer wants clients to stick around and not jump ship. It’s really not in their own interest to promote products that discourage their customers.”
Whether private equity’s foray into the annuity world is a positive development for consumers is not yet known, said Jasmin Sethi, CEO of Sethi Clarity Advisers.
By its nature, private equity lacks transparency, but insurance products are highly regulated, Sethi noted.
Having more transparency in the annuity market would generally benefit customers, as products are currently hard to compare, despite a handful of services designed to help people vet annuities side-by-side, Sethi said.
If private-equity owners guide their companies to slim down product sets, that would be a plus, she noted.
“There are a lot of high-cost products, and there are too many products,” she said. “There could be a reduction, to a better value set.”
"There is room for the market to grow,” and private-equity firms likely see the possibility of annuities increasingly being considered within defined contribution plans, she said.
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