Variable annuity companies might
become the apple of private equity
eyes in 2013. That’s according to a
new report from Deloitte, which says the
appetite for insurance mergers and acquisitions
among private equity firms appears
to be on the rise, “especially in the variable
The report does not name the carriers
that might be likely candidates for purchase,
nor does it project the number of
such deals that might occur in 2013. But
it does make a case for why private equity
firms might be giving the variable annuity
industry a once over.
This news should be a heads up to variable
annuity advisors, many of whom
watched in disbelief last year as many carriers
intentionally downsized or reined in
their businesses in reaction to the double
whammy of prolonged low interest rates
and high volatility. Hartford Financial left
variable annuity sales altogether.
If what Deloitte is seeing proves out,
advisors will have some new questions
about the business to untangle, such as,
if some carriers want out of the variable
annuity business, why does private equity
Appetite to Buy
The insurance industry is in “the
early innings of a general rebound,”
say Deloitte researchers in a report on
expected insurance merger and acquisition
activity in 2013.
Private equity interest in this area is
only one of the trends spotlighted in the
report. Others include economic and regulatory
uncertainty, deal complexity, tax
reform and more.
The discussion on private equity activity
in this area involves not only the annuity
and life-health sides of the insurance
business but also the property-casualty,
multiline managed care, title, mortgage
guarantee and finance guarantee sectors.
In the insurance business, volume,
pricing power and economic activity “are
moving in the right direction,” the researchers
say of the industry’s appeal to
An environment like that can offer a
“good entry point” for deals among investors
looking to buy an insurance company
or selected assets at a low price, they note.
These buyers would be firms wanting
to “aggressively manage” their new acquisitions,
“clean up the business” and then
“quickly sell it to reap appropriate rewards.”
The traditional market for insurance
underwriting “is risk and balance-sheet
intensive and therefore it can be hard for
private equity firms to leverage their investment,”
the researchers state.
Even so, there has been a “recent uptick”
in private equity mergers and acquisitions
in the insurance industry and they expect
that will continue in 2013.
One reason for this expectation has to do
with available cash. Many private equity
firms today are “sitting on ready cash,” and
they are looking for investment options in
a low-return market where good deals can
be hard to find, the researchers say.
Current discount-to-book values may
make a stock deal challenging, but it is “relatively
easy” for these firms to offer cash for
“solid companies that are trading inexpensively
and need to do deal,” they explain.
Another reason is that many life insurers
are, as the report puts it, “trying to sell
off their volatile variable annuity business.”
By comparison, private equity firms
(presumably, the ones that are interested
in buying such carriers) “may be able to
sit on the block until interest rates recover
without worrying about short term profitand-
It is unlikely that many annuity advisors
have given much consideration to that last
point, at least not in public venues.
Instead, many have voiced concern that
private equity takeovers of existing carriers
could trigger market retrenchments
as the new owners pare back operations,
products and advisor support in order to
boost higher return on investment.
Some advisors are also concerned about
the owners’ commitment to, and willingness
to stay in, the insurance business for
the long term. They continue to state that
clients buy annuities for the long term. So,
advisors generally prefer to deal with carriers
that appear to be highly likely to stay
in the business for the long term.
Any notion that a private equity firm
might be readying a carrier for a quick sale
therefore sends shivers down the backs of
This concern may impact some advisors’
product recommendations and even
influence their decisions about whether
to contract with privately held carriers.
Much will depend on how the private equity
firms address these issues with advisors
and the larger insurance community.
Assuming the Deloitte assessment is
correct – that private equity owners may
be able to to “sit” on a block (book of business)
while interest rates recover “without
worrying about the short-term profitand-
loss volatility” – and assuming that
advisors start factoring that possibility
into their assessment of future prospects,
the “sitting” attribute may be viewed as
only a short-term factor.
After all, there is no telling whether the new owners will, in fact, decide to hold on to their insurance acquisitions long enough for interest rates to recover.
Even if they do, some may just wait out the low-interest era and then shake the carrier loose. That possibility may prompt some industry professionals to guess that this could happen in, say, just three or four years from now – an ownership period that is very common to private equity firms that flip their holdings frequently. Rates could always go up sooner or later, but in the absence of solid indicators about what might happen, short-term thinking tends to prevail.
Then again, it is also possible that certain private equity firms will do the exact opposite. That is, they might instead see benefit in owning insurance carriers for the long term. And, if they have indicated long-term intentions to regulatory authorities while in the midst of doing their deals, the firms might also feel compelled –
by ethics and/or by law – to keep those long-term promises.
The Uncertainty Factor
Right now, there are a lot of uncertainties –
for instance, about whether Deloitte’s assessments will pan out, and, if so, whether often-expressed advisor concerns about private equity players will hold water. That makes this a time of wait-and-see. It pumps some edginess into the air.
But the firms definitely have noses in the tent. Private equity firms made more than 100 acquisitions in the insurance industry in the 24-month period ending Dec. 31, 2012, according to a Deloitte analysis of FactSet Merger data, 2012.
In general, overall activity in insurance industry mergers-and-acquisitions may see an uptick in 2013, the researchers say, noting that there has been a “flurry of activity by insurance companies” to rebuild internal mergers and acquisitions capabilities.
This is in contrast to 2012, when the number of insurance industry mergers and acquisitions tracked by SNL Financial decreased by about 20 percent from 2011, they point out.