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Life Health > Annuities

Annuity Issuers Armor Up Against Private Equity Players

By Allison Bell

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What You Need to Know

  • Higher rates have improved risk appetites.
  • U.S. direct writers are using captive insurers and sidecars to boost performance.
  • Annuity spring has not melted the variable annuity market freeze.

Private equity firms’ pressure on the U.S. individual annuity market will keep the supply of registered index-linked annuities growing, according to Swiss Re Institute analysts.

The traditional annuity issuers have been armoring up with captive insurers and sidecars to push back against the private equity-backed newcomers.

The clash of the traditional issuers and the private equity players will probably fuel RILA market expansion without doing much for traditional fixed annuity sales or a revival in the traditional variable annuity market, the institute analysts predict in a new report on the world’s life and annuity markets.

The increase in interest rates that began in 2022 has boosted U.S. individual fixed annuity sales, by increasing the yields that issuers can get on the bond portfolios supporting the annuity obligations and making offering fixed products more attractive. But “most of this is likely now past,” the institute analysts write. “Products that combine fixed and variable aspects will continue to grow steadily.”

Swiss Re is one of the world’s major reinsurers, or sources of capital and advice for the “direct writers” of insurance. Its analysts’ views could affect how Swiss Re uses its capital, the strategies its customers follow and overall market conditions.

What it means: Clients yearning for a traditional variable annuity renaissance may have to make do with what’s on the shelf now.

Clients who love RILAs may get more options.

The backdrop: Private equity firms invest in companies through strategies other than buying publicly traded stock.

In the United States, the firms have benefited from the tough rules imposed on public companies in the wake of the 2000-2002 internet stock crash and rule exemptions for companies with a small number of sophisticated shareholders.

Private equity firms have acquired about $1 trillion in life and annuity company assets around the world since 2009, and they now own about 25% of U.S. individual annuity liabilities.

Meanwhile, they and the traditional U.S. annuity markets are facing a world in which U.S. retirement savers have a savings shortfall of about $45 trillion.

“Life insurance retirement income will be a key part of the solution to the retirement savings gap,” the institute analysts say.

Private equity friction: Swiss Re Institute analysts see competition between private equity players and traditional issuers moving to a new stage.

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.”

Credit: Alfa Photo/Shutterstock

Allison Bell

Think_Allison

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