Annuity Issuers Armor Up Against Private Equity Players

Here are three things the analysts say about the shift.

1. Higher interest rates have reduced traditional issuers' need to transfer blocks of business.

When rates were very low, and the world seemed risky, the direct writers were happy to pass blocks of business to private equity players through reinsurance deals.

Now, "all types of insurers are regaining risk appetite for holding assets and writing more asset-intensive business," the analysts write.

2. Traditional U.S. direct writers are using new corporate structures to cope with obstacles that have kept them from competing on a level playing field with the private equity players.

Private equity firms have benefited by using strategies such as locating companies in jurisdictions with favorable tax rules and insurance company investment rules to reduce capital requirements, lower their taxes and invest in somewhat riskier but higher-yielding assets, according to the institute analysts.

U.S. life insurers are responding by using their new captive insurers and "sidecars," or organizations that let them share the costs, benefits and risks of writing insurance or reinsurance with outside investors, to get access to the same kinds of capital rules and tax rules that private equity players have sought, the analysts say.

"Sidecars provide more flexibility compared to traditional on-balance-sheet capital and therefore support larger block transactions without burdening the existing capital base," the analysts add.

In some cases, captive insurers or sidecars may also help public insurers even out the earnings they report to shareholders through their quarterly U.S. generally accepted accounting principles financial statements.

3. Private equity firms face more pressure.

One symptom of the pressure is that private equity players are selling more annuities themselves and are focusing somewhat less on buying existing blocks of business, the analysts suggest.

The future: In spite of the competition and search for new ways to grow, "companies are not rushing to re-introduce products that performed poorly during the very low interest rate era," the analysts say. "We do not expect companies to assume more risk in variable annuity lines."

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