Harbinger Capital’s $350m (£225m, €270m) deal to buy the troubled US life-insurance business of Old Mutual, the Anglo-South African financial services group, came as a surprise to many in the City – not least because gossip had long suggested Old Mutual was struggling to generate any serious interest in the asset at all.
At the same time, however, many were left asking exactly what Harbinger, a US private equity and hedge fund business, would want with such a heavily regulated business as life insurance. The official answer was that the new owners would be able to juice the returns from the life insurer’s multibillion-dollar assets that back its life-insurance liabilities.
Philip Falcone, chief executive of Harbinger Capital Partners, said: “The purchase of Old Mutual’s US business is an attractive proposition. We expect to realise substantial returns from continuing business improvements and Harbinger’s ability to enhance the value of the asset portfolio.”
Harbinger has hired outside expertise in the form of Leland C. Launer Jr, former chief investment officer of MetLife, to run the business. Similarly, Transamerica Re, the US life-reinsurance business being sold by Dutch insurer Aegon, is said to have attracted at least initial interest among some financial investors.
You would be forgiven for thinking this kind of play had been killed off by the financial crisis. While “the great moderation” lasted and markets – particularly credit markets – seemed set to go only ever in one direction, the idea of betting that you could earn more from a pool of assets than you had promised to pay out was fairly straightforward. This is known as a spread business – and it drove all manner of activity before the crisis. Mortgage bonds and collateralised debt obligations in all their variety were the true froth of this kind of thinking, but it applies as much to traditional annuity businesses – which pay retirement income – and life insurance, though perhaps historically in a less aggressive form.
In the UK, specialist monoline annuity businesses were set up to exploit the apparent ease of access to such spread profits and bring competition to the traditional insurance players in the sector. Paternoster – one of the first, and initially most successful, of these – has now been put up for sale as the private equity and hedge fund groups among its backers have given up on hopes that their investment is likely to come good.
In spite of this, others are still operating in the sector. Investment banks are increasingly moving into the market for corporate pension risk, too. Many of these banks want only to be traditional intermediaries and are developing capabilities to sell on the various forms of risk that come with long-term annuity business – market, inflation and longevity risks.
Goldman Sachs, through its brand Rothesay Life, is the only one so far that is also backing a significant proportion of such deals with its own capital – or taking on the risks itself. But this is based on its view of its own great skill with derivatives trading and risk management, which allows it to earn high returns on an asset portfolio that, for the most part, is likely to consist of gilts. This may give some clue to Harbinger’s strategy – although undoubtedly one of Rothesay’s big contributors to its returns is the large upfront fees it charges to take on pension liabilities.
However, it seems extremely unlikely that a wholesale rush into regulated life and pensions business by private equity and hedge fund money is back on. For the most part, where such investors are pursuing deals in the financial services sector it will be particularly the lower-risk infrastructure or administrative-type services where they will hunt for deals, according to investment bankers. But even there they may not find much joy.
A consortium of US private equity groups has been successful in its £2bn (€2.4bn, $3.1bn) purchase of WorldPay, the payments processing business of RBS of the UK. Balboa, the mortgage-related home insurance arm of Bank of America, which originally came with its purchase of Countrywide Financial, has apparently attracted the interest of at least 10 private equity groups. But bankers still think this deal and others in the field are far more likely to end up with strategic investors winning out over financial ones.