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Private Equity Firms Find Bargains in Insurance Deals Tough economy for insurance leads to distressed sellers. By Linda Koco

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hy would private equity firms want to buy their way into the insurance arena? That question has been puzzling a lot of insurance professionals in the field and in the home office, ever since they noticed that more private equity firms are cutting deals with insurers. Some, including Guggenheim Capital, Harbinger Group and Apollo Global Management have already bought annuity-focused carriers in the past year or two or entered into reinsurance arrangements. Other private equity firms are said to be nibbling at the edges of life insurance operations. Insurance professionals find this surprising because the return on equity (ROE) for insurance companies has not been exactly stellar in the past few years. The historic ROE range for life and annuity insurers is roughly 10 to 15 percent, according to valuation experts, but in recent times, the percentage for some has been in the single digits. In fact, Aswath Damodaran, a professor of finance at the Stern School of Business at New York University (NYU), has a chart that puts the average ROE for life insurers at 7.4 percent, as of January 2012. The average is for 29 carriers, based on updated data from Valu Line. Some carriers may be doing better, of course. For instance, a recent survey from Accenture found that 68 equity analysts from 16 countries are expecting to see an average pre-tax ROE of 14.9 percent for 2012 from insurers to which they have assigned “buy” ratings. That’s up from 13.7 percent in 2011. This is on a global basis. Then again, the 20 largest global insurers had an average pre-tax ROE of just 11.8 percent in 2011, the New York consulting compa8

ny says. So stretching to a ROE of near 15 percent in 2012 may be, well, a bit of a stretch. Many private equity firms prefer to buy when the expected ROE, for established companies, is closer to 20 percent. Since insurance operations, even in good economies, are typically below that, this makes the “why” question intriguing, to say the least. The question is especially relevant, since life and annuity carriers have been battered in the past few years by low interest rates, market volatility and other financial storms, to the point some carriers are exiting lines of business, limiting sales, and/or curbing policy features, development, growth plans and more.

Bargains and Business Models

Gus Cheliotis, a vice president and investment counsel from Harbinger

InsuranceNewsNet Magazine » December 2012

Group, provided some answers during the recent LIMRA annual meeting in Chicago, based on his own company’s perspective. Harbinger is a New Yorkbased private equity firm that bought Fidelity and Guaranty (F&G) Life from Old Mutual in April 2011. The firm also has a “reinsurance platform” in Bermuda, he said. On the bargain side of things, Cheliotis pointed out that Harbinger purchased F&G at 35 percent of book value. Some other private equity firms have bought insurance operations within the past year at 90 percent of book value or close to book value, he said. “Prices are all over the map,” he said. But bargains are still available — and it’s a bargain that Harbinger wants.

The Business Model

That’s not all this private equity company


December 2012