Apollo, Carlyle, and KKR are all said to be considering bids for UK-based Pension Insurance Corporation (PIC), with bids due last week in a JP Morgan-led process.
Originally published in the December 15th edition of Transacted.
PIC covers more than 300,000 policyholders and is a leader in a niche corner of the insurance world known as bulk annuities.
Bulk annuity providers work with corporations to take over their defined benefit pension liabilities, either writing a bulk annuity policy for the pension fund or assuming the assets and liabilities of an entire pension scheme.
In both cases, the insurer offers companies an attractive way to shift pension liabilities off of their balance sheets—an easy out for pension plans that, at best, serve as a distraction to the core business, and, at worst, can drive meaningful balance sheet holes with asset-liability mismatches.
Getting out from under a cumbersome pension plan can also free up debt financing capacity or remove a potential roadblock to M&A activity.
In exchange, the bulk annuity provider gets access to a pile of investable assets. These firms are able to deploy capital to higher-returning, illiquid investments like private equity or other alternatives. That’s a significant improvement over pension funds that are typically forced to invest primarily in short-term, liquid assets that provide lower returns (worsening pension funding problems).
Market Shifts
The market for bulk annuity deals is enjoying a resurgence thanks to the current high-rate environment. That’s provided a jump in portfolio returns for pension funds that had previously been staring down large gaps in funding levels, with assets that looked unlikely to meet upcoming liabilities.
Those gaps meant sponsoring companies were often required to make additional contributions, and precluded any buyout from bulk annuity providers, who would only entertain deals for pension schemes without funding shortfalls.
While bulk annuity deals are on the rise globally, the UK, in particular, has emerged as a market leader thanks to its proclivity for corporate pensions relative to other geographies.
Private Equity Interest
Private equity has become infatuated with insurers in recent years, a trend kicked-off by Apollo’s relationship with insurer Athene, co-founded in 2009 and now a wholly-owned part of the firm.
Insurers provide alternative asset managers with a source of perpetual capital, the premiums generated by policies that must be invested to ensure coverage of future claim payouts.
Fund managers take their standard management fees on invested insurance assets, an increasingly large part of management fee hauls for firms employing this strategy—Athene accounts for the majority of Apollo’s earnings, for example.
Alongside Apollo, Carlyle acquired a stake in reinsurer Fortitude Re. in 2018, KKR took a majority stake in Global Atlantic in 2021 (which it said last month it plans to fully acquire), Brookfield launched its reinsurance unit in 2021, and Blackstone has taken minority stakes in four separate insurance businesses, each with deals for the firm to manage their assets.
In the US, private capital now holds around a tenth of the entire life insurance market, managing more than $850 billion in assets—welcome insulation against traditional fundraising difficulties, on top of the earnings potential.
Picking up PIC
PIC is just the latest opportunity for investors to expand their insurance holdings. With £44 billion in invested assets against £39 billion in insurance obligations, that opportunity is sizeable.
It’s a welcome target for the rumored suitors Apollo, Carlyle, and KKR, which are reported to have been eyeing the emerging UK bulk annuity market even before this process, searching for opportunities to secure a foothold. With PIC, the group has a cleanly packaged, scaled business to acquire, rather than the messier alternative of attempting to launch a new entity.
Given the competitiveness of the process and the relative strength of the asset, any deal is expected to come at a premium. Earlier rumors centered around a £5 billion purchase price, above PIC’s book value.
That should mean a successful exit for current owners Reinet (an entity overseen by Richemont Chairman Johann Rupert), HPS Investment Partners, Abu Dhabi Investment Authority, and CVC Capital Partners via its long-term holds strategic opportunities platform.