The life insurance industry looks to be evolving for the better, but not everyone is happy about it.
For eight years, private equity firms, asset managers, and like-hearted buccaneers have been buying up batches of life policies and even whole businesses. Customers sometimes feel left in the lurch, wondering where their rock-solid insurers have gone, and the regulators are wary. These are nerve-wracking days, for some.
This reminds me of the Battle of the Marne, France 1914. That’s just the sort of fellow I am.
At the moment of crisis, with the enemy at the gates of Paris, the French hoped a desperate counterattack would reverse the trend. From the front, General Ferdinand Foch sent this message to his commander:
“My center is giving way; my right is retreating; situation excellent, I am attacking.”
I wouldn’t kid you; that’s what he wrote. If Foch’s words don’t inspire when your tennis game falters, it’s time to put down the racket.
The life insurance industry is in peril, with steadily low interest rates to blame. New leaders must step up, breathe life into wavering old ranks. The line must be held; millions of life policies need safeguarding; the business simply must become more profitable.
As we stand in the breach, the question today: are PE investors our ramrod-backed generals? At the last, desperate moment, will they save the day?
Forgive the drama, but we need it. When I tell people I write about life insurance, they go all po-faced; little do they suspect the drama and import. The US life insurance industry has been around for 262 years, I’m told. We won’t let it fall without a struggle.
This new class of investors counters the insurance industry’s prudence with habitual boldness, not to say recklessness. What could they want from such a boring old industry?
It’s simple. Insurers have exactly what private equity firms crave: investible assets, a dependable income stream from policy premiums and account charges. If you’re in the PE game, this steady flow of investible capital makes insurers perfect targets for acquisition.
Their promise is clear, too: the new investors promise to make life insurance and annuity investment profitable again – a good place to plant your money. Can they do it without sinking the ship?
As we know, the trend for traditional insurers to jump ship, selling their places to bolder investors, has been worrisome for state regulators. They’ve responded by introducing tighter requirements and have scotched deals that raised red flags. Yet overall, there’s been little to report. The wild new investors have always said: life insurance is different, and we’ll handle it with care – and look like they mean it.
A study this year from A.M. Best, the world’s largest credit rating agency, which specializes in the insurance industry, revealed that insurers owned by private equity firms and similar ‘wild ones’ do, indeed, tend to hold riskier assets, like asset-backed securities and privately placed debt. These aren’t crazy investments, just harder to punt in tough economic times, but they offer much better yields than the bonds favored by traditional insurers.
Best’s study showed the new players earn a better average investment yield, too, currently 4.62% versus 4.01% at the end of last year. Insurers aren’t used to seeing yields rise; if this is the trend, Paris is safe.
What do policyholders think? It’s common to encounter suspicious minds: clients of solid old insurers wake up one day and find their dependable rock has somehow rolled on. There was a lack of transparency in some cases when deals were under negotiation, but that’s how big business is done, and it could hardly go down without a hint of bitterness.
Yet, the customers have stayed and more keep on coming. The ‘cowboys’ have proved themselves solid, avoided crazy risk and offered improved products. Once over the shock of the shake-up, the buyers lined up.
The ‘why’ is simple – the newcomers are offering promising investments. Indexed annuities are a hot product today, as the industry’s new masters (their aspiration, at least), as experienced investors, are adept at managing them to growth.
Indexed annuities, as with most investment products, are varied and complex, a good thing if you’ve educated yourself and consulted an advisor or two. Annuities should only be purchased from sound insurance companies with the financial ‘oomph’ to last out the long run. They aren’t securities, so the SEC doesn’t oversee them, but state insurance regulators do.
Indexed annuity contracts allow you to invest a premium (a lump sum in this case) with returns linked to an index, like the S&P 500. You’ll be protected from negative market returns and can earn when the index rises. A guaranteed lifetime income is possible if you choose the right riders. Returns may be capped and there are limitations to consider, yet the product’s solidity and guaranteed returns are driving wide adoption by people planning for retirement.
Change is good, though it can sting. The life insurance industry needed a shakeup, and it’s here. I’m glad the regulators are alert, but the trend now is positive.
Twenty years ago, I worked for a news agency in Moscow. Those were happy times, in our dingy little office looking over Mayakovsky Square, the mad canvass of our Russian life. That job was a sitcom and soap opera – maybe you’ve had one. Eventually, you leave in disgust for greener pastures, opportunity, and money, with glad memories for life. I moved into finance, where the matter at hand was less gleeful, but certainly more rewarding.
My editor Rebecca was there, back in the day. She said, “It’s nice to have a fun job, where you love everyone – but it’s no good if you can’t pay the dentist.” We all reach that crisis; then opportunity knocks, cash in hand. It’s only natural to open the door.