#143 | Protective Acquires Great-West US Life & Annuity

Last week, Protective announced that it has acquired Canada’s Great-West’s US Individual Life & Annuity business. In one way, this is like yet another The Fast & The Furious movie – you know the script by now. Large insurers with diversified businesses have been casting off their US Life and Annuity operations left and right. The arguments are always the same. Life insurance and annuities is a low-growth, low-return, capital intensive business. Dumping the blocks, even at a loss, frees up capital that can be invested in better opportunities elsewhere in the financial services sector. Great-West is no different.

But there are some interesting angles to this story. This wasn’t a run-off (SunLife), spin-off (MetLife/Brighthouse), an IPO (AXA/AXA US) or a sale to a private firm (Lincoln Benefit). Instead, it was one insurer dumping its blocks onto another insurer. Why would one insurer want what another one doesn’t? In my mind, it likely comes down to accounting and corporate strategy. Great-West is a Canadian insurer that has to comply with a different set of accounting and capital rules. Many products that can look great under US rules look terrible under Canadian rules. That’s why Canadian insurers and European insurers have been some of the most active in divesting their US operations, with the notable exceptions of Manulife/John Hancock, Aegon/Transamerica and Prudential Plc/Jackson. It’s easy to see how Great-West’s Single Pay UL products, which comprise a significant portion of new flows into the division, could be problematic under Canadian accounting.

Protective, on the other hand, is sitting in a very different seat. Protective is owned by the third largest insurer in Japan, Dai-Ichi, and has the luxury of what appears to be practically a blank check for US acquisitions combined with what are rumored to be abnormally low return hurdles. It doesn’t take much to get stockholders in Japan excited when the alternative is 0% yields. Consequently, Protective has been able to continue its long track record of buying up blocks from other insurers with even more capital to deploy.

So why did Protective want Great-West, besides the economic benefits? There are some interesting strategic alignments as well. Early last year, Lincoln announced that it was buying Liberty Mutual Life, but the bank-distributed Single Premium Whole Life business was being purchased (technically reinsured) by Protective. Liberty has long been a stalwart in Single Premium Life (SPL) and held a commanding share of the market. Its main competitor was Great-West, now also soon to be owned by Protective. Protective just cornered the SPL market in the banks. There are no serious competitors to the scale that Protective will command. Interesting, isn’t it? And do you know who else is making a play there? Symetra – also owned by a Japanese insurer. Probably not a coincidence.

On the annuities side, Great-West was a small player growing at a nice clip with RIA-focused VA offerings, including a newly released Structured Annuity. Protective has recently made an effort to grow in the IMO space with focused FIA offerings, but Great-West adds some new products and distributors to the mix. It’s a good match. And, finally, Great-West has traditionally been a major player in the COLI/BOLI market, something that Protective has dabbled with but never seriously considered. My guess is that they’ll keep the franchise going at Great-West for both annuities and COLI/BOLI just to see what happens. Why not?

Ultimately, this is a good acquisition for both parties. Great-West gets to focus on what it wants to do and Protective picked up a good economic asset, at least according to their view, along with marketshare in places that it had already signaled it wants to invest – particularly SPL. How they handle their newfound monopolistic power in that market will be interesting to watch.