Pending deal would place MassMutual among largest individual annuity writers

Massachusetts Mutual Life Insurance Co.'s proposed acquisition of American Financial Group Inc.'s annuities business stands to add a robust indexed individual annuities line to MassMutual's market-leading business in the fixed-rate individual annuity space.

MassMutual topped the table in fixed individual annuities through the first three quarters of 2020, according to data gathered from the LIMRA Secure Retirement Institute. American Financial's Great American Life Insurance Co., and the subsidiaries that will be part of the transaction, were ranked ninth in indexed individual annuities for the period.

The deal would represent a significant expansion of MassMutual's sales channels with the addition of Great American Life's distribution network of banks, independent agents and independent broker/dealers.

"This acquisition is an ideal complement to our existing annuity business and furthers MassMutual's strategy to reach more customers where they are with the products they need," MassMutual spokesperson Chelsea Haraty said in an email, citing the distribution opportunity with banks in particular. An additional source of diversified earnings will also help the company pay a competitive dividend, Haraty said.

The deal would merge the country's seventh-largest individual annuity premium writer through the first nine months of 2020, MassMutual, with the 20th-largest in Great American Life. The resulting entity would have been the third-largest writer of individual annuity premiums through the first three quarters of 2020 on a pro forma basis, according to S&P Global Market Intelligence data.

The combined individual annuity businesses of MassMutual and Great American Life would trail only Jackson Financial Inc. and American International Group Inc. on a pro forma basis and place it ahead of Lincoln National Corp. and New York Life Insurance Co.

Moody's in commentary for its ratings affirmation of MassMutual said the acquisition should help the insurer offset profits lost from the sale of its retirement services business to Empower Retirement LLC.

The deal would convert American Financial from a multiline insurer into a company more concentrated on property and casualty, which will improve its investment profile in equity markets, Piper Sandler analyst Paul Newsome said in a Jan. 27 research note to clients. The company's share price saw a double-digit percentage bump during the week ending Jan. 29.

Shedding the annuities business will shrink American Financial's investment portfolio, which is of the company's financial strengths, Newsome wrote.

"The exit of the life business ... significantly reduces [American Financial's] invested asset base which had benefited from [the company's] well-regarded investment team," he said.

American Financial was never quite able to convince investors that its life portfolio was less risky than that of its peers, according to Credit Suisse analyst Michael Zaremski. Because management held more than a fifth of the insurer's stocks, it could shrink the company without too much friction, Zaremski said in a Jan. 27 research note.

The deal also makes competitive sense because private equity-backed annuity players have a "major structural cost advantage" over traditional insurers, and mutual insurance companies have an organizational advantage over public companies, Zaremski wrote.

"Mutual insurers such as MassMutual theoretically have a meaningfully lower cost of capital advantage versus [American Financial] and publicly traded insurers, given mutuals aren't beholden to public investors and are owned by their policyholders, who rarely speak up," he said.