Private Equity Increasingly Tapping Into the Potential of US Fixed, Indexed Annuity Market
January 29, 2013 by Fran Matso Lysiak
OLDWICK, N.J. – Private equity firms are increasingly tapping into what they view as a potentially lucrative financial opportunity in fixed annuities, including indexed, in the United States.
In December, the U.K.-based Aviva plc agreed to sell its U.S. life and annuity business, Aviva USA Corp., to the Bermuda-based Athene Holding Ltd. for $1.8 billion (Best’s News Service, Dec. 21, 2012).
Judith Alexander, director of sales and marketing for Beacon Research, told Best’s News Service with the acquisition, Athene would immediately become the No. 2 issuer of indexed annuities. It also gives them lots of assets to invest — “a big plus for their backer, private equity firm Apollo.” Athene intends to operate Aviva as a going concern as opposed to a closed block of business or “just a big pile of assets to manage.”
For total U.S. sales of fixed annuities, which include indexed, private-equity market share went from 2.8% in 2011 to 9% in 2012, according to Beacon (Best’s News Service, Dec. 13, 2012). Indexed annuities aren’t as credit-rating sensitive as other insurance products, such as variable annuities, which is probably a reason why private equity is interested in these companies, said Ed Shields, associate director of equity research for Sandler O’Neill. Private equity firms also can use more debt to operate at higher leverage ratios than what publicly traded companies are allowed by their regulators, he said.
In its announcement on the deal, Athene Holding said it received a $621 million capital infusion in anticipation of the transaction. That infusion came from private equity firm, Apollo Global Management LLC (NYSE: APO). Athene Holding is majority owned by Apollo Life Re Ltd.
It’s likely Apollo’s acquisition of Aviva was motivated by the fact that annuities represent “a large and growing source of capital,” said Sheryl Moore, chief executive officer and president of Moore Market Intelligence, which owns Annuityspecs.com, noting there has been a trend over the past few years in indexed annuity and/or indexed life insurance companies being acquired by private equity firms.
Among them: Private equity firm Harbinger Investments acquired OM Financial Life and OM Financial Life of New York, with the companies today known as Fidelity & Guaranty Life and Fidelity & Guaranty Life of New York, which still sell these products under their new ownership, Moore said.
“In general, we’re glad to see these companies stepping up to the plate when so many other long-time annuity issuers are pulling back,” Alexander said, noting this gives distributors and agents competitively priced/designed products to sell and helps sustain overall industry sales. Also, private equity companies active in the annuity industry are investment specialists, Alexander said. “They seem to be betting that they can achieve higher investment returns than the established annuity issuers and, therefore, operate more profitably.”
Athene’s acquisition of Aviva won’t immediately have a tremendous impact on the indexed life and/or indexed annuity industries, Moore said. There will likely be an initial “fire sale” mentality, where insurance agents sell as much of the current Aviva product as they can, before the acquisition closes, Moore said. After that, there will likely be a slight decline in indexed life sales as the finalization of the acquisition nears.
For 2011, Aviva USA, with sales of $4.5 billion, had the second-highest sales of indexed annuities in the United States. Allianz Life Insurance Company of North America remained the sales leader, with sales of $6.3 billion, according to Annuityspecs.com.
Guggenheim, another private equity firm, acquired Security Benefit Life, and after that, entered the indexed annuity market, Moore said. Guggenheim also acquired EquiTrust Life Insurance Co., which still sells indexed annuities and a single premium indexed life insurance product, Moore said. But the company stopped selling its traditional indexed life insurance product upon being acquired — just seven months after the product was introduced, she said.
Athene Holdings acquired Liberty Life Insurance Co., marketed as RBC Insurance, and today is known as Athene Annuity & Life Assurance Co., Moore said. Although they’re still selling indexed annuities, they exited indexed life insurance upon being acquired, Moore said.
Recently, Athene Annuity & Life Assurance closed on its acquisition of Presidential Life Corp. in a transaction valued at about $414 million (Best’s News Service, Jan 2, 2013). Last summer, Athene Annuity & Life said it would acquire the Nyack, N.Y.-based Presidential Life (NASDAQ: PLFE) for $14 a share cash (Best’s News Service, July 16, 2012).
In December, Canada’s Sun Life Financial also agreed to sell its domestic U.S. annuity business and some life insurance business for about $1.35 billion to a company of Guggenheim. Delaware Life Holdings is expected to close on the purchase by the end of the second quarter (Best’s News Service, Dec. 17, 2012).
Guggenheim is acquiring Sun Life’s variable annuities, which is “unusual” for Guggenheim, Shields said. Shortly after this deal was announced, share prices of companies such as Hartford Financial rose because some market participants viewed it as a positive sign that Hartford may be able to find a buyer for its variable annuity block, he said.
As of the third quarter, Aviva USA was the top seller of indexed life but it’s been publicly alluded that Aviva’s life insurance block may not remain with Athene, Moore said, noting Liberty Life, marketed as RBC Insurance, exited indexed life once it was acquired by Athene.