A growing trend over the last five years involves private equity firms purchasing insurance policies and firms. In some cases, they’re buying up parts of insurance companies – like their life insurance or annuity divisions – and in other cases they’re simply buying the entire insurance company. The motivations behind the sale and purchase of these assets is up for debate, but there is no doubt that the trend will continue and that it can have a profound impact on your insurance and annuity policies – and even your financial plans. It’s time to take stock of the situation and have an extensive review of the status of your insurance contracts.
For starters, you need to know who these companies are. Private equity (often abbreviated PE) firms are financial investment companies that use their funds to acquire other businesses or launch startup businesses by providing capital funding. They’re referred to as “private” because the companies that they own are not “publicly held” – meaning that they’re not owned by the public through shares of stock that are traded on an exchange.
Private equity firms try to make money by purchasing under-performing assets or tiny startup companies and eventually “taking them public” by selling the companies they own to the public through an initial public offering (IPO). In the last five years, these PE firms have begun purchasing the assets of life insurance companies.
Since 2019, there have been at least 345 transactions between private equity firms and insurance companies. The total purchase price for these transactions is in excess of $20 billion. In many cases, the PE firms are buying only parts of the insurance company – essentially building a portfolio of life insurance and annuity policies. For instance, Sixth Street Partners recently announced a deal to purchase Talcott Resolution Life Insurance Company. Talcott itself purchased the group annuity division of Harford Financial Services in 2018.
It’s important to note that this is a completely different situation from you choosing to sell your life insurance policy to a third party. These so-called life settlements, or viatical settlements, occur when a policy holder decides to stop paying premiums but wants to receive more than the cash surrender value of the policy. In this case, selling your policy to a third party would remove your premium payment obligation and allow you to receive a payment in compensation. These arrangements are all voluntary on the policyholder’s part. In contrast, these private equity transactions are completely outside the policyholder’s control.
There are two opposite motivations at work here that are creating an incentive to these kinds of deals. When it comes to the insurance companies selling these divisions, or being acquired entirely by PE firms, it’s out of a desire to free up capital.
When an insurer sells life insurance policies or annuities, they must keep safe and liquid assets available to pay any claims that come due. This happens when an insured person dies or the owner of an annuity begins receiving payments under the terms of the annuity contract. The money that insurance companies keep on hand to pay claims are called reserves.
Reserves must be held in safe and readily available assets like cash and short-term bonds. Unfortunately for the insurance companies, interest rates have plummeted ever since the 2008 financial crisis. The trend to lower rates only accelerated with the onset of the COVID-19 pandemic. This means that they have billions of dollars tied up in very low-paying interest assets. By selling off some or all of these policies, they not only receive large cash payments from the private equity firms, they also can cash in their low-interest investments and deploy the capital elsewhere. With the capital infusion, they can pursue higher-returning investment strategies that they hope will lead to higher profits.
The private equity firms are acquiring these assets for complimentary reasons. People make premium payments for their life insurance and annuity coverage. These premiums payments represent a steady stream of cash flow for PE firms. They can use these premium payments to help fund their acquisition of other companies, or to fund the growth of the small startup businesses they hope to take public. The premium payments represent investable funds that they don’t have to borrow, which is a normally a common course of action for PE firms.
The short answer is, nobody really knows. On a surface level, there may be few or zero changes. After all, many of your rights as a policy holder are spelled out in your life insurance or annuity policy, which is a legal contract. It’s not like things can be altered at will by the new owners of your insurance contracts. There probably will be surface-level changes that can impact you, like:
These kinds of changes shouldn’t change your basic experience with your policies in a meaningful way.
However, there is certainly the possibility for changes to how your contracts “perform.” Performance generally refers to the growth of the value of your contract. These values are generally called accumulated or cash values and they grow over time as you make premium payments and interest is credited to your policy. Performance changes can result from the way certain charges, limits and interest rates are set. Among the items that private equity firms can change on existing, in-force contracts are:
What could be a concern to policy holders is a general lowering of interest rates and an increase of fees. This could be especially problematic for indexed products, including:
With these products, you can potentially earn higher interest crediting than traditional policies through the use of “indexing.” Under this strategy, the interest rate used for crediting interest is based on the performance of one or more indexes, which are generally tied to domestic and international stock and bond markets. The hope is that the performance of the indexes will yield a higher interest rate than traditional “fixed” interest rate policies. Theoretically, interest rates in these indexed accounts can be much higher than fixed rates, allowing for rapid cash accumulation.
However, the insurer usually reserves the right to set the participation rate and cap rate each year. Setting these caps lower results in cost savings for the insurance company and slower asset growth for the policyholder. This is a grave concern to owners of indexed products. If this is combined with an increase in fees charged, growth in cash value can be suppressed. In extreme cases, this could prevent the product from achieving its specific purpose for your retirement or estate plan.
Another potential concern is the credit rating, financial strength and claims-paying ability of the new PE owners. Policyholders may have chosen certain companies based on their financial strength; indeed this has generally been a point of pride among insurance companies. Private equity companies may not have the same stellar credit rating or strength of balance sheet. In the worst case, a PE company may end up having more commitments than it has assets to meet them. If the new insurer should become insolvent, then there may not be sufficient funds to pay the monthly income you’re entitled to with an annuity, or pay the full life insurance death benefit for your heirs.
Because of these changes, you should make sure to conduct more frequent reviews of your insurance assets, including life insurance and annuities. When conducting your review, look for answers to these questions:
If the answer is “yes” to some of these questions, you shouldn’t necessarily panic. Insurance companies have always been able to set these parameters, and they’ve always been sensitive to the overall financial success of the insurance company. In other words, just because these things declined in one year is no reason to jump ship.
However, drastic changes in these parameters could be a sign of trouble. Several years in a row of declining interest crediting could also be a warning sign.
Your options for dealing with these changes will vary based on your exact circumstances. It is absolutely possible to switch your coverages and change insurance companies. In fact, you can generally do this without any tax consequences under the rules of 1035 exchanges. However, there are certain difficulties with replacing your insurance coverage. For one thing, if you’re trying to exchange life insurance policies, you might face:
The 1035 exchange rules become more complicated if your existing policy has a loan outstanding.
Annuity exchanges are generally less complicated than life insurance but are not without their difficulties. For one thing, you’ll be facing a brand new surrender change and schedule on a new annuity. This can be especially bitter when you’re already past the surrender charge on your existing contract. Adding 10 more years of surrender charges may not be an optimal move.
Another downside to switching insurance companies is that minimum interest rates are usually fixed in the insurance contracts. The minimum on an older contract is likely to be higher than on a new policy. Maybe drastically so. In this case, you might be giving up a lot of interest income if you end up earning only the minimum guaranteed interest rate.
Planning for a vibrant and successful retirement has always required sound strategies and faithful execution. Efficient estate plans have the same requirements. Working with an experienced financial professional who understands your risk tolerances and needs is a critical component of any retirement and estate plan. These changes to insurance company ownership don’t alter the fact that you need to work closely with your financial professional and stay on-task. In fact, these changes make close cooperation with them even more important.
A seasoned financial professional can help you remain focused on your goals and keep a level head when things don’t go exactly as planned, like if your interest rate cap is set lower than you’d like. They can keep you from overreacting and switching strategies or products needlessly.
Tell your financial professional that you’re aware of the private equity trend. Ask them to notify you if your insurer, or your policy, is purchased by a PE firm. Tell them you’re concerned about policy performance under a PE firm. Review all aspects of policy performance with your financial professional, including:
Resolve to meet regularly with your financial professional. The private equity trend is likely to continue for the foreseeable future, so you’ll need to stay on your guard. Ask if you should work on a backup plan. A backup plan may include creating a short list of alternative insurance companies and products that you switch to if your policy performance is impacted by private equity.
Above all, don’t be distracted from following your plan. Keep saving and investing. Don’t let a bad interest crediting year spiral you into reckless spending. Keep your eyes on the goal, which is a sound and enjoyable retirement and the strategic distribution of your estate. A close working relationship with your financial professional will help with this, especially in this new age of PE-owned insurance companies.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.