Insurance This Week: Private Equity Purchase and Lack of Fresh Macro Data

 In this insurance sector analysis, we discuss the event of the week, the macro environment, and EPS implications. 

Summary: Event of the Week

The mere fact that a private equity firm purchased Brighthouse Financial, a life insurance company, is interesting. Private equity encompasses investments typically managed by private equity firms with long-term investment horizons that inject capital and operational expertise with a goal to produce above-average returns.

Summary: Linking Macro Trends to EPS  

Favorable equity markets (EPS: higher investment income)

Ongoing tailwind for investment income generated by both life and P&C companies. The favorable impact will benefit P&C companies more than life companies given the higher weighting of equities typically owned in the investment portfolios of P&C companies.

Unfavorable job data (EPS: lower premiums)

Worsening trend may be a factor contributing to recently reported declines in life companies’ group premiums. A continuation of this trend simply translates into a decline in employee headcount, which would impact premium revenue for companies with concentrations of group insurance sold to corporations.

Ongoing inflation (EPS: higher claims, higher benefit ratio)

The government shutdown and the resulting data blackout introduced uncertainty on the inflation front. Estimates indicate that upward trends have persisted, which as we have highlighted will likely push up the combined ratios of P&C companies. Expenses to settle claims for auto and homeowner policies, for example, are likely to be higher than expected because of the tariff-driven higher prices for imported auto parts and lumber needed to settle auto and homeowner losses.

Detail: Event of the Week 

Brighthouse Financial announced November 6 that it had signed a definitive merger agreement to be acquired by Aquarian Capital, a private equity firm “with a strategic portfolio of insurance and asset management solutions.”

Brighthouse’s three main challenges have been to improve ROE, expand scale, and roll out changes to its product mix. Achieving this trifecta is no small feat. Brighthouse competes in the highly competitive annuity space within the life insurance industry. Although successfully hitting the trifecta entails risk and requires a longer-term investment horizon, their effort could be profitable. Through this lens, Brighthouse makes sense as a private equity investment.

Both insurance investors and life insurance management teams should be very interested in the outcome of this P/E investment. If Brighthouse emerges as a successful P/E investment, it would demonstrate an important lesson about the success that can unfold in the life insurance sector under the guidance of a long-term partner. That would contrast with the challenge of public company management teams to implement changes for growth while delivering steady, consistent share-price appreciation under the short-term scrutiny of public markets.

Scale challenge

Brighthouse faces a challenge to scale its businesses, and the annuity business is one example. Comparing the RIA entities of other life companies to those of Brighthouse provides insight into the size of the challenge. Annuities are a core product that financial advisors in these RIA subsidiaries are selling. We pulled Brighthouse’s RIA entities (shown below) with FactSet’s Groups and Subsidiaries functionality. For comparison, the RIA subsidiaries of Hartford and MetLife follow. The size differences of the RIA businesses among the three companies as measured by AUM, which includes annuities, is apparent.

ROE challenge

One benefit that should emerge as Brighthouse increases the scale of its annuity and other businesses is achieving a higher ROE—which is currently below peers—by simply spreading fixed costs over a larger base. A higher ROE will be central to calculate the valuation Aquarion can realize if or when it decides to exit its investment in Brighthouse.

Product mix challenge

Brighthouse would also benefit from a change in business mix. For example, its concentration of variable annuities with living benefit riders is a capital-intense offering subject to economic downturns. The product could be more appropriate (less risky) if Brighthouse builds its capital base.

Brighthouse is an interesting private equity opportunity: a long-term investment, an element of risk given the challenges, and potential upside if Aquarian can successfully hit the trifecta. It will be a significant signal to investors and management teams if the Brighthouse investment, shielded from the short-term demands of the public market, shows signs over the coming years of building scale, increasing ROE, and improving its product mix to emerge as a successful, long-term, high-return private equity investment.

Detail: Linking Macro Trends to EPS

Our Macro Tracker lists key economic data relevant to insurance company earnings. The right-hand column ties macro trends to the potential impact on company earnings.

Jobs and inflation

No additional job data or inflation data were released over the last week. In our prior reports we highlighted the ongoing downturn in jobs data, the potential impact on group premiums, and inflation’s impact on higher claim costs and benefit ratios. Several companies and product lines were cited as at risk from unemployment rates and ongoing inflation.

S&P 500

The equity market remained strong over the past week, which continues to bode well for the investment income of companies with equity-related investments.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.