Insurers Shed Annuity Assets
November 5, 2012 by Leslie Schism
By LESLIE SCISM
Fixed annuities, investments sold by life insurers to generations of conservative savers, have become hot properties to some of Wall Street’s most-sophisticated money managers.
Entities controlled by hedge funds, private-equity groups and other investment managers—including Apollo Global Management, Harbinger Capital Partners and Guggenheim Partners—have been snapping up annuity businesses with assets totaling tens of billions of dollars.
Fixed annuities come in many flavors, but some of the most-common promise savers a specified interest rate for a number of years. Many insurers want out of the business, where profit margins have narrowed as interest rates sank to historic lows.
The newcomers, on the other hand, believe these humdrum retirement accounts offer a way to boost money under management. They think their investment savvy will help them find profits where traditional insurers can’t, say bankers, analysts and two of the new owners. The move into insurance could help further diversify their operations and provide a more stable source of earnings.
Some rivals say the firms may be willing to employ risky investment strategies that could end badly if the economy turns sharply downward. But two midsize insurers acquired this summer by affiliates of Guggenheim, a $160 billion money manager, won credit-ratings upgrades—a sign that some acquisitions can help fortify balance sheets.
The moves come as industrywide fixed-annuity sales are down from 2009, when interest rates were higher and many small investors were fleeing the stock market for perceived havens in the wake of the 2008 financial crisis. Lower interest rates have since dulled enthusiasm.
Some of the new owners are offering products with more-generous terms for customers, while others are focused on making money off the blocks of business they have acquired.
Insurers make money on fixed annuities by earning more on their investments than they pay out to consumers in interest. Some of the annuity businesses being acquired by the financial firms include older contracts with guaranteed minimum annual rates of 3% to 4%. That is close to what high-quality corporate bonds, the preferred holding of many insurers, are yielding nowadays.
Traditional insurers face a dilemma as older bonds underlying their annuity business mature. They could load up on higher-yielding securities linked to home mortgages to sustain profits. But “many are gun shy” after getting burned on those investments during the financial crisis, said William Pargeans, an analyst at ratings firm A.M. Best Co.
In bidding for insurance properties, financial firms that have a higher tolerance for risk “may be able to assume higher returns” than a traditional insurer, said Scott Robinson, Moody’s Investors Service senior vice president.
Apollo’s Athene Annuity & Life, for instance, has 24% of its assets in residential mortgage-backed securities that aren’t backed by Fannie Mae or Freddie Mac, according to the company. That is substantially higher than the industry average in the single-digits, analysts say.
“We have been very careful in crafting our portfolio” and acquired securities at steep discounts to face value, said James Belardi, chief executive of Apollo’s Athene Holding Co. insurance business and a former executive at American International Group Inc.
At the discounted prices, the portfolio “could withstand a repeat of the 2008 financial crisis without us losing money,” he said.
In July, the Delaware-based Athene Annuity & Life agreed to pay $415 million to acquire Presidential Life Corp., an annuity specialist in Nyack, N.Y. If approved by Presidential shareholders, the transaction will add some $3.5 billion in assets to Athene’s existing $10 billion.
Apollo’s goal is a “market-leading retirement-savings company,” Mr. Belardi said.
To sell annuities to U.S. consumers, firms must establish state-based insurance units that are subject to the same risk-based-capital rules that govern other insurers. If an insurer runs into serious trouble, industry-funded guaranty associations help make customers whole up to specified limits, according to the National Organization of Life & Health Insurance Guaranty Associations.
Harbinger Group Inc., a holding company controlled by Philip Falcone’s Harbinger Capital, acquired a U.S. life and annuity business last year from a British insurer, Old Mutual. Harbinger’s Fidelity & Guaranty Life has $17 billion of invested assets; non-agency residential mortgage-backed bonds were about 7% of the bond portfolio at Dec. 31, according to SNL Financial.
Guggenheim Chief Executive Mark Walter said the financial-services firm got into annuities after being hired in 2009 to manage investments for Security Benefit Life, a Kansas insurer that suffered significant losses in mortgage bonds in the crisis.
That assignment led to Guggenheim forming a group of investors to buy the insurer and shore it up with additional capital, he said.
Guggenheim doesn’t have “a big-picture growth acquisition strategy” for insurance, Mr. Walter said, but looks at available businesses to round out its operations.
Bankers said numerous small to midsize life insurers are on the auction block, and at least one big U.S. annuity issuer—a unit of U.K. insurer Aviva PLC—has drawn interest from financial firms. An Aviva deal would likely top $1 billion, they said. Aviva declined to comment.