Are private equity firms ‘tinkering’ with life carrier investments?
There is nothing like new information to challenge commonly held notions. Case in point is a new report on investment portfolios of life insurers acquired in private equity (PE) buyouts.
Published by SNL Insurance, the report notes that a common critique of such deals is that the buyer will “tinker” with an acquired insurer’s investment portfolio. That tinkering is thought to include the purchase of exotic securities and the assumption of more risk — both of which can pose threats to solvency.
But SNL’s analysis of the portfolios of two carriers that were acquired in PE-related deals in recent years found something different. The “changes made seem to be relatively in line with the industry as a whole,” the researchers said.
The carriers studied were:
- EquiTrust Life Insurance. Affiliates of Guggenheim Capital bought the company from FBL Financial Group Inc. in 2011.
- Presidential Life Insurance. Now called Athene Annuity & Life Assurance Co. of New York, this company was acquired in October by Athene Holding, which has financial ties to investors at private equity firm Apollo Global Management.
Here are the highlights:
EquiTrust: Between Sept. 30, 2011, (the last full quarter prior to the close of the deal) and March 31, 2014, the insurer’s allocation to bonds decreased and its allocation to mortgage loans increased.
Presidential Life: Between end of third quarter 2012 (prior to its being sold) and March 31, 2014, this carrier also cut its exposure to bonds and loaded up on mortgage loans.
Now for the surprise: U.S. life insurers exhibited the same trends across the industry, the SNL researchers said.
For instance, bond exposure dropped from 75.3 percent of the life industry’s total cash and invested assets as of Sept. 30, 2011, to 74.8 percent as of March 31, 2014, they said. In addition, industrywide mortgage loans climbed from 9.5 percent to 10.1 percent in the same period. Here is more industrywide detail from another SNL report.
What about performance? In 2013, both carriers saw higher net investment yields than the broader industry, the researchers said. They noted that EquiTrust came in at 6.2 percent and Presidential Life at 5.2 percent, while the industry average was 4.9 percent. (The numbers would be 6.1 percent, 5.3 percent and 4.5 percent, respectively, if including net realized capital gains, minus taxes.)
Does this greater performance reflect “private-equity influence”? It’s hard to say without having access to a lot of investment data. But another SNL finding — that both companies had good years in 2010, prior to their private equity backing — raises another possibility as well. This is the possibility that the carriers’ own investment DNA may have played a role as well.
Skeptics probably will reserve judgment on the assumptions they hold about private equity tinkering with carrier investments, at least until the acquired carriers have spent more years under the roofs of their new owners.
But the SNL data provides a first peek at carrier investment activity at such firms — actually, of these two specific firms. At the very least, the results provide food for thought for insurance professionals who are interacting with the carriers, competing against them or regulating them.