Americans own more than 160 million individual life insurance and annuity policies. A big, unexpected change is ahead for many of them.
Traditional life insurers are leaving the business in droves. The responsibility for death benefits, which might be a half-century away, or for annuity income streams that run over decades, is increasingly in the hands of a new breed of insurance-company owner.
The growing wave of deal activity is unsettling to some policyholders who had chosen well-established and often strategically conservative companies in the 262-year old U.S. life-insurance industry. In some cases, a key component of families’ financial planning suddenly is in the hands of newcomers, some known for investing in distressed companies and unusual securities. Moving to a new carrier isn’t always simple or affordable depending on their age or declining health.
The newcomers, which include private-equity, asset-management, and other investment firms, often believe they are scooping up insurers on the cheap, or are attracted to the premiums paid by policyholders that they will be able to invest for fees. Some are acquiring entire insurance companies, and others are buying stakes in them. Policyholders who bought life insurance from Allstate Corp. unit Allstate Life Insurance Co., for instance, soon will rely on entities managed by Blackstone Group Inc. to pay their beneficiaries after they die.
The steep drop in interest rates since 2008 is a driving force behind the deal frenzy. It has led traditional insurers, which invest policyholders’ premiums and the capital backing up their obligations primarily in plain-vanilla bonds, to retreat from products most hurt by low rates. Many are unloading blocks of old policies and annuities. More deals are expected, as shareholders pressure publicly traded insurers to ditch businesses that drag down returns.
Many new owners think their expertise with less-common investments, such as privately placed corporate debt and asset-backed securities, will give them an edge over more cautious insurers. The new guard sometimes invests in unusual things--like the Los Angeles Dodgers baseball team. But their investments generally are only modestly riskier than traditional insurers’, and they on average hold more cash and have larger capital cushions as an offset, according to an analysis by ratings firm A.M. Best.
So far, more than two dozen investment firms own or control 50 U.S. life-insurance companies out of just over 400, according to Best’s data. The new owners’ insurers total more than $600 billion of assets, according to Best.
Principal Financial Group Inc., which has been in the life-insurance business for 142 years, is in the process of discontinuing sales of individual life products and certain types of annuities to U.S. consumers, and is looking for ways to potentially divest old blocks of business. Hartford Financial Services Group Inc. and Voya Financial Inc. have exited entirely insurance and annuity sales to individuals, including through divestitures.
MetLife Inc. spun off the bulk of its U.S. retail operations, and American International Group Inc. has a public offering of its life-insurance and retirement-services unit planned. AIG is selling a 9.9% stake in the unit to Blackstone, which will manage a portion of the assets. Last week, Prudential Financial Inc. said it reached a $1.5 billion pact to sell an annuities unit to Bermuda-based Fortitude Re, which is backed by investors including Carlyle Group.
The new guard includes affiliates of Apollo Global Management Inc. and KKR & Co. Ranks also include smaller firms that most ordinary Americans wouldn’t know.
"The restructuring in the insurance industry isn’t showing any sign of slowing down," said James Belardi, chairman and chief executive of Athene Holding Ltd., an insurer that Apollo helped launch in 2009.
Smaller investment firms with limited resources are increasingly seeking to do deals, say industry bankers, lawyers and consultants. Consumers may face more risk if these buyers replace financially strong parents, particularly if they aim to invest aggressively.
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