The fact that hedge funds and other alternative fund managers are buying blocks of business from struggling insurance companies is a positive, but a full takeover may not be, says Moody’s Investors Service in a new report.
The rating agency says that the life insurance industry is drawing increased interest from alternative investment managers, “as the protracted low interest rate environment, regulatory constraints and earnings pressures have led insurers to explore selling underperforming segments.”
Traditional strategic buyers are showing limited interest in these businesses, Moody’s notes, so alternative investment managers, including hedge funds and private equity funds, are frequently emerging as bidders for life insurers’ underperforming blocks of U.S. life and annuity business.
“The emergence of financially motivated buyers is credit positive for sellers of blocks of business, as these additional buyers increase demand,” said Weigang Bo, a Moody’s analyst and author of the report. “This increases insurers’ capacity to shed higher risk businesses and legacy runoff blocks at potentially better prices.”
However, it also says that a takeover of a life insurer by a hedge fund would usually be credit negative for the insurer as the fund manager, “may seek to extract dividends and employ more aggressive capital deployment and investment strategies, among other shareholder-friendly moves.”
Nevertheless, Moody’s expects financial buyers to continue to be interested in the U.S. life insurance sector, “and to remain opportunistic in the medium term as more motivated sellers emerge.”