How an insurer in Iowa became the most coveted asset on Wall Street

Link: https://www.ft.com/content/b4261b75-f0cd-4d23-9253-8c392a5e0ba9

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American Equity Investment Life last week rebuffed an unsolicited $4bn offer from a rival controlled by Paul Singer’s Elliott Management, capping a tumultuous year during which Bhalla also antagonised his company’s largest shareholder, Canada’s Brookfield Asset Management.

Underpinning the boardroom drama is Bhalla’s determination to keep AEL, one of the few independent annuities operators left, out of the wave of consolidation sweeping through the industry as private equity groups hoover up insurance assets.

The bad blood between Bhalla and Brookfield is a product of a deal that AEL entered into in November with start-up fund manager 26North, founded by the former longtime Apollo Global executive Josh Harris.

Bhalla had first turned to Brookfield in 2020 as it sought a white knight to fend off an earlier hostile bid from Apollo, where Harris worked at the time. Now with the Elliott bid out in the open, AEL and its $70bn of assets are in the crosshairs as a clutch of Wall Street investment titans circle the company.

Apollo, Brookfield, KKR, Carlyle Group, Ares and Sixth Street are among the many groups that could be bidders in a potentially frenzied auction next year.

Author(s): Sujeet Indap and Mark Vandevelde

Publication Date: 29 Dec 2022

Publication Site: Financial Times

ER Doctors Call Private Equity Staffing Practices Illegal and Seek to Ban Them

Link: https://khn.org/news/article/er-doctors-call-private-equity-staffing-practices-illegal-and-seek-to-ban-them/

Excerpt:

A group of emergency physicians and consumer advocates in multiple states are pushing for stiffer enforcement of decades-old statutes that prohibit the ownership of medical practices by corporations not owned by licensed doctors.

Thirty-three states plus the District of Columbia have rules on their books against the so-called corporate practice of medicine. But over the years, critics say, companies have successfully sidestepped bans on owning medical practices by buying or establishing local staffing groups that are nominally owned by doctors and restricting the physicians’ authority so they have no direct control.

These laws and regulations, which started appearing nearly a century ago, were meant to fight the commercialization of medicine, maintain the independence and authority of physicians, and prioritize the doctor-patient relationship over the interests of investors and shareholders.

Those campaigning for stiffer enforcement of the laws say that physician-staffing firms owned by private equity investors are the most egregious offenders. Private equity-backed staffing companies manage a quarter of the nation’s emergency rooms, according to a Raleigh, North Carolina-based doctor who runs a job site for ER physicians. The two largest are Nashville, Tennessee-based Envision Healthcare, owned by investment giant KKR & Co., and Knoxville, Tennessee-based TeamHealth, owned by Blackstone.

Author(s): Bernard J. Wolfson

Publication Date: 22 Dec 2022

Publication Site: Kaiser Health News, California HEalthline

People Will Pay for Illiquidity

Link: https://www.bloomberg.com/opinion/articles/2022-11-01/people-will-pay-for-illiquidity

Excerpt:

Adding liquidity is, conventionally, desirable. It reduces risk: If you can sell a thing easily, that makes it less risky to buy it, so you are more likely to commit capital to the thing. It increases demand: If only a few rich people can buy a thing with great difficulty, it will probably have a lower price than if everyone can buy a share of it easily. It improves transparency and makes prices more efficient. Also, financial innovation tends to be done by banks and other financial intermediaries, and their goal is pretty much to do more intermediation. More liquidity means more trading, which means more profits for banks.

Another, funnier sort of financial innovation is about subtracting liquidity. If you can buy and sell something whenever you want at a clearly observable market price, that is efficient, sure, but it can also be annoying.

….

Or we have talked about a fun post from Cliff Asness titled “ The Illiquidity Discount,” in which he argues that private equity is essentially in the business of selling illiquidity. If you are a big institution and you buy stocks in public companies, the stocks might go down, and you will be sad for various reasons. You might be tempted to sell at the wrong time. You will have to report your results to your stakeholders, and if the stocks went down those results will be bad and you will get yelled at or fired. Whereas if you put your money in a private equity fund, it will buy whole public companies and take them private, and then you won’t know what the stock price is and won’t be able to sell. The private equity fund will send you periodic reports about the values of your investments, but those values won’t necessarily move that much with public-market stock prices: The fund will base its valuations on its estimates of long-term cash flows, and those will not change from day to day. By being illiquid, the private equity fund can look less volatile. Getting similar returns with less volatility is good; getting similar returns and feeling like you have less volatility also might be good.[4] Asness writes:

If people get that PE is truly volatile but you just don’t see it, what’s all the excitement about? Well, big time multi-year illiquidity and its oft-accompanying pricing opacity may actually be a feature not a bug! Liquid, accurately priced investments let you know precisely how volatile they are and they smack you in the face with it. What if many investors actually realize that this accurate and timely information will make them worse investors as they’ll use that liquidity to panic and redeem at the worst times? What if illiquid, very infrequently and inaccurately priced investments made them better investors as essentially it allows them to ignore such investments given low measured volatility and very modest paper drawdowns? “Ignore” in this case equals “stick with through harrowing times when you might sell if you had to face up to the full losses.” What if investors are simply smart enough to know that they can take on a lot more risk (true long-term risk) if it’s simply not shoved in their face every day (or multi-year period!)? 

One objection to this sort of financial product — illiquidity provision — is that it does not generate a lot of transactions. If you work at a bank and you think of a product that will cause customers to trade bonds or houses or diamonds more often, then it is pretty easy to figure out how to make money from that product. 

Author(s): Matt Levine

Publication Date: 1 Nov 2022

Publication Site: Bloomberg

Why private equity sees life and annuities as an enticing form of permanent capital

Link: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of-permanent-capital

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Once they’ve acquired a book, firms can turn their attention to driving value. Building on our guidelines for closed-book value creation, owners have six levers that can collectively improve ROE by up to four to seven percentage points (exhibit):

  • Investment performance: optimization of the SAA and delivery of alpha within the SAA
  • Capital efficiency: optimization of balance-sheet exposures—for example, active management of duration gaps
  • Operations/IT improvement: reduction of operational costs through simplification and modernization
  • Technical excellence: improvement of profitability through price adjustments, such as reduced surplus sharing
  • Commercial uplift: cross-selling and upselling higher-margin products
  • Franchise growth: acquiring new blocks or new distribution channels

Most PE firms view the first lever, investment performance, as the main way to create value for the insurer, as well as for themselves. This lever will grow in importance if yields and spreads continue to decline. Leading firms typically have deep skills in core investment-management areas, such as strategic asset allocation, asset/liability management, risk management, and reporting, as well as access to leading investment teams that have delivered alpha.

Capital efficiency is also well-trod ground, and for private insurers it presents a greater opportunity given their different treatment under generally accepted accounting principles, (GAAP), enabling them to apply a longer-term lens and reduce the cost of hedging. However, most firms have yet to explore the other levers—operations and IT improvement, technical excellence, commercial uplift, and franchise growth—at scale. Across all these levers, advanced analytics can enable innovative, value-creating approaches.

Author(s): Ramnath Balasubramanian, Alex D’Amico, Rajiv Dattani, and Diego Mattone

Publication Date: 2 February 2022

Publication Site: McKinsey

Beware of Private Equity Gobbling Up Life Insurance and Annuity Companies

Link: https://cepr.net/report/beware-of-private-equity-gobbling-up-life-insurance-and-annuity-companies/

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Private equity (PE) firms have had their eye on individual retirement savings since 2013 when they were first allowed to market directly to individuals. Pension funds already allocate workers’ retirement savings to PE firms, which use these assets to fund a range of risky equity and debt investments. Access to personal retirement savings, including IRAs and 401(k)s, would open up a huge new source of capital for PE.

PE firms’ first attempts to get a piece of these very sizable direct contribution assets were largely unsuccessful. More recently, however, they have turned to acquiring and/or managing life insurance and annuity assets. Some PE firms buy out life insurance and annuity companies, acquiring their assets. Others take a minority stake in a life insurance or annuity company in exchange for the right to manage all of the company’s assets. In both cases, the PE firm substantially increases assets under its management. They have also stepped-up efforts to recruit near-wealthy as well as wealthy investors, so-called retail investors, to allow PE firms to manage their assets. These activities have been a game changer for the largest PE firms. As Blackstone CEO Stephen Schwarzman put it as he lauded the firm’s third quarter 2021 performance, this quarter has been “the most consequential quarter [in history] . . . a defining moment in terms of our expansion into the vast retail and insurance markets.”1

Meanwhile, policyholders find that a PE firm now manages their retirement savings. This raises a major concern for individuals and government regulators: Given PE firms’ track record of failing to observe their duty of care as owners of Main Street companies as well as their poor fund performance in recent years,2 can they be trusted to protect the retirement savings of millions of Americans?

Author(s): EILEEN APPELBAUM

Publication Date: 13 January 2022

Publication Site: CEPR (Center for Economic and Policy Research)

Congressional Hearing Considers Private Equity-Controlled Insurers

Link: https://communications.willkie.com/110/1827/uploads-(icalendars-pdf-documents)/congressional-hearing-considers-private-equity-controlled-insurers.pdf

Excerpt:

On September 8, 2022, the U.S. Senate Committee on Banking, Housing and Urban Affairs (“Senate Banking Committee”) held a hearing to consider “Current Issues in Insurance.” One of the items discussed at the hearing was Senator Sherrod Brown’s (D-OH) March 2022 letter to the National Association of Insurance Commissioners (the “NAIC”) and U.S. Department of the Treasury’s Federal Insurance Office (“FIO”) regarding private equity-controlled insurers.1

In his letter, Senator Brown requested that FIO, in consultation with the NAIC, prepare a report for Congress that evaluates the investment strategies pursued by private equity-controlled insurers, the impact on protections for pension plan beneficiaries following pension risk transfer arrangements, and whether state regulatory regimes are capable of assessing and managing risks related to private equity-controlled insurers. In the early summer, the NAIC and the U.S. Department of the Treasury (on behalf of FIO) each provided substantive responses to Senator Brown.2

Author(s): Kara Baysinger | Leah Campbell | Jane Callanan | Matthew J. Gaul
Donald B. Henderson, Jr. | David G. Nadig | Allison J. Tam

Publication Date: 27 Sept 2022

Publication Site: Willkie Farr & Gallagher

Death Is Anything but a Dying Business as Private Equity Cashes In

Link: https://khn.org/news/article/funeral-homes-private-equity-death-care/

Excerpt:

Private equity firms are investing in health care from cradle to grave, and in that latter category quite literally. A small but growing percentage of the funeral home industry — and the broader death care market — is being gobbled up by private equity-backed firms attracted by high profit margins, predictable income, and the eventual deaths of tens of millions of baby boomers.

The funeral home industry is in many ways a prime target for private equity, which looks for markets that are highly fragmented and could benefit from consolidation. By cobbling together chains of funeral homes, these firms can leverage economies of scale in purchasing, improve marketing strategies, and share administrative functions.

According to industry officials, about 19,000 funeral homes make up the $23 billion industry in the U.S., at least 80% of which remain privately owned and operated — mostly mom and pop businesses, with a few regional chains thrown in. The remaining 20%, or about 3,800 homes, are owned by funeral home chains, and private equity-backed firms own about 1,000 of those.

….

Robertson said the funeral home industry is different from other sectors that private equity firms might consider investing in, describing it as a calling comparable to working in hospice care. Foundation Partners is fortunate their backers understand the service part of the industry, as well as the financials, he said. “Private equity firms aren’t necessarily known for having deep compassion for people. They’re more known for their financial returns,” he said. “To get both is really important.”

Foundation Partners owns Tulip Cremation, an online service that allows people to order a cremation with just a few clicks — and without having to set foot in a funeral home. Tulip currently operates in nine states where Foundation Partners has funeral homes. The company expects the service to eventually operate nationally.

Author(s): Markian Hawryluk

Publication Date: 22 Sept 2022

Publication Site: Kaiser Health News

Letter to FIO and NAIC from Senate Banking Committee

Link: https://www.banking.senate.gov/imo/media/doc/brown_letter_on_insurance_031622.pdf

Excerpt:

  1. What risks do the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders?
  2. What risks do lending and other shadow-bank activities pursued by companies that also
    own or control significant amounts of life insurance-related assets pose to policyholders?
  3. Are there risks to the broader economy related to investment strategies, lending, and
    other shadow-bank activities pursued by these companies?
  4. In cases of pension risk transfer arrangements, what is the impact on protections for
    pension plan beneficiaries if plans are terminated and replaced with lump-sum payouts or
    annuity contracts? Specifically, how are protections related to ERISA and PBGC
    insurance affected in these cases?
  5. Given that many private equity firms and asset managers are not public companies, what
    risks to transparency arise from the transfer of insurance obligations to these firms? Will
    retirees and the public have visibility into the investment strategies of the firms they are
    relying on for their retirements?
  6. Are state regulatory regimes capable of assessing and managing the risks related to the
    more complex structures and investment strategies of private equity-controlled insurance
    companies or obligations? If not, how can FIO work with state regulators to aid in the
    assessment and management of these risks?

Author(s): Sen. Sherrod Brown

Publication Date: 16 March 2022

Publication Site: U.S. Senate Banking Committee

Private Equity (PE)-Owned U.S. Insurers’ Investments Decrease as of Year-End
2021; Number of PE-Owned U.S. Insurers Increases

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-PE-owned-YE2021.pdf

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The BACV of total cash and invested assets for PE-owned insurers was about 6% of the U.S. insurance
industry’s $8.0 trillion at year-end 2021, down slightly from 6.5% of total cash and invested assets at
year-end 2020. The number of PE-owned insurers, however, increased to 132 in 2021 from 117 in 2020,
but they were about 3% of the total number of legal entity insurers at both year-end 2021 and year-end 2020.

Consistent with prior years, U.S. insurers have been identified as PE-owned via a manual process.
That is, the NAIC Capital Markets Bureau identifies PE-owned insurers to be those who reported any
percentage of ownership by a PE firm in Schedule Y, and other means of identification such as using
third-party sources, including directly from state regulators. As such, the number of U.S. insurers that
are PE-owned continues to evolve.1
Life companies continue to account for a significant proportion of PE-owned insurer investments at
year-end 2021, at 95% of total cash and invested assets (see Table 1). This represents a small decrease
from 97% at year-end 2020 (see Table 2). Notwithstanding, there was a slight increase in PE-owned
insurer investments for property/casualty (P/C) companies, to 4% at year-end 2021, compared to 3% the
prior year. In addition, there was also a small increase in total BACV for PE-owned title and health
companies’ investments, at about $1.1 billion at year-end 2021, compared to under $1 billion at yearend 2020.

Author(s): Jennifer Johnson and Jean-Baptiste Carelus

Publication Date: 19 Sept 2022

Publication Site: NAIC Special Capital Markets Reports

How Deceptive Lobbyists Are Exploiting the Goodwill of Public Employees

Link: https://www.governing.com/finance/how-deceptive-lobbyists-are-exploiting-the-goodwill-of-public-employees

Excerpt:

If you followed the saga of the route to passage of the Inflation Reduction Act, you already know that a last-minute maneuver by Arizona Sen. Kyrsten Sinema torpedoed a provision in the Senate compromise bill that would have finally closed the so-called “carried interest loophole.” That’s where savvy real-estate financiers and managers of private partnerships such as hedge funds and private equity deals are able to cut their income taxes as much as 40 percent by masquerading their compensation as a capital gain that enjoys much lower income tax rates.

….

Public pension funds, public employees and their associations need to put a stop to this, and they have both the moral high ground and the clout to do so. It’s high time for political and financial blowback. The PR firms orchestrating this nonsense will just keep it up until their profiteering clients get called out.

….

The reality is that if the fund managers had to pay standard tax rates on their income, it would have zero impact on pension systems’ returns. What are the managers going to do? Cook up fewer deals? Pull up stakes and move to a tax haven? Demand even higher fees on top of their already cushy income? They can huff and puff all they want, but pensioners would lose nothing if the loophole were plugged.

Author(s): Girard Miller

Publication Date: 13 Sept 2022

Publication Site: Governing

NY State Pension Returns 9.5% in FY 2022, While NYC Pensions Lose 8.65%

Link: https://www.ai-cio.com/news/ny-state-pension-returns-9-5-in-fy-2022-while-nyc-pensions-lose-8-65/

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The New York State Common Retirement Fund has reported a 9.51% investment return for fiscal year 2022, while the New York City Retirement System reported an annual preliminary loss of 8.65% among its five pension funds.

However, the fiscal year for the state’s pension ended March 31, while the city’s pension funds ended their fiscal year June 30, after a quarter during which global markets tumbled and the S&P 500 fell by more than 16%.

…..

The portfolio’s alternative investments buoyed the pension fund’s returns, which raised the portfolio’s asset value to $272.1 billion as of March 31. Private equity returned 37.57% for the year, while the fund’s real estate investments and real assets returned 27.4% and 16.12% respectively. The three asset classes account for nearly 24% of the portfolio’s total asset allocation. The pension fund recently reported that it had committed more than $3 billion in alternative investments during June alone.

The NYCRF had an asset allocation of 49.70% in publicly traded equities, 21.18% in cash, bonds and mortgages, 13.64% in private equity, 10.00% in real estate and real assets and 5.48% in credit, absolute return strategies and opportunistic alternatives. The fund’s long-term expected rate of return is 5.9%.

Author(s): Amy Resnick

Publication Date:

Publication Site: ai-CIO