By Kritika Venkat, Varshika Prasanna, Aman Singla (NYU)
Photo: Scott Graham (Unsplash)
Introduction
Private equity giant, Blackstone, sold its 36% stake in UK based life insurer, Rothesay Life, to US-based mutual life insurer Massachusetts Mutual Life Insurance (MassMutual) and Singapore sovereign wealth fund GIC. GIC and MassMutual already own a significant stake in Rothesay but will now have 49% each of the company after the deal. Blackstone sold its stake for £2.1bn on September 30, 2020, valuing the privately owned UK insurer at £5.75 bn.
GIC, Blackstone, and MassMutual initially purchased shares in Rothesay in 2013 and the Private Equity firms owned 26.5% whilst MassMutual owned 6.5% back in 2016. In 2017, the three firms took Goldman Sachs’ 32.7% stake resulting in all three of them increasing their interest and stakes substantially. The deal in itself has increased Rothesay’s valuation significantly as it was valued at £2 bn when Goldman sold their stake and now is valued at more than double the amount it was three years ago.
Although Rothesay has been said to be eyeing an initial public offering, the private company came out saying that their extensive support from private shareholders resulted in no requirement for their shares to float. Rothesay’s growth has been impressive with its growth in AUM (Assets Under Management) from £7.5bn to £56bn since 2013. The group has pensions of more than 800,000 people and is always looked upon for pension solutions by many UK companies.
Overview of Blackstone
Blackstone is one of the world’s leading investment firms and has maintained a rigorous deal approval process with all employees voting on a deal before it is fully considered. The investment giant has approximately $151.5 billion in liquidities which supported them in the first quarter when the company incurred a net income loss of $2.6 billion. been used to purchase companies using a strategy called leveraged buyouts. Recently, several PE investors have seen to ride the liquidity wave to exit holdings. Blackstone also sold a 23% stake in Essel Propack Ltd in early September in this COVID environment of excess liquidity.
Overview of GIC
GIC Private Limited is a long term investor with more than 100 billion USD in assets across 40 countries. They leverage their strengths to enhance the international purchasing power of their assets by following a strategy called Long Term Orientation. They invest in public and private markets and also have cross-asset groups like Economics & Investment Strategy and Integrated Strategies Group. The Singapore based investment firm builds their portfolio such that they adhere to the Singapore Government’s risk parameters. In such an uncertain environment, GIC’s allocation strategy of having a policy portfolio with six asset classes (Developed Market Equities, Emerging Market Equities, Nominal Bonds and Cash, Inflation-linked Bonds, Private Equity, and Real Estate) diversifies their portfolio and minimises risk over the long term period.
SOURCE: GIC: Managing The Portfolio
GIC’s strategy is driven by both top-down and bottom-up analyses. The top-down analysis is where the company reviews macroeconomic trends such as politics, corporate governance, and currency as well as some industry trends and catalysts. The bottom-up investing approach looks at company-specific trends, recent deals, their financials, supply and demand in order to make a sound investment decision. However, GIC prides itself on long-term value investing as most of their deals are held for more than 4 years and deliver good long-term returns. Thus, it is no surprise that GIC maintained its interest in Rothesay and upped its stake significantly, strategically paving the way to a lucrative future.
Overview of MassMutual
MassMutual is an American mutual life insurance company founded in 1851 with more than 5 million clients across the world. They provide life insurance, disability income insurance, long terms insurance, retirement/401k plan services, and annuities. The diverse range of financial products they offer makes them a strong and steady company in the insurance sector. The company’s exceptional performance is marked by their strong balance sheet and other financials. In 2019, its surplus increased by 21% to $18.9 bn and total adjusted capital rose up to $24.5 bn, a whopping 23% increase. The Fortune 500 company had their highest dividend payout totalling $1.7 bn last year as well. The company soared through the Great Depression and the 2009 Financial Crisis and pays credit to their ‘well diversified General Investment Account’ that maintains the ability to ‘weather downturns in financial markets’.
“MassMutual and GIC are the natural long-term holders for Rothesay”- Qasim Abbas, Senior Managing Director at Blackstone
Overview of Rothesay Life
Rothesay Life, established in 2007, is a leading provider of regulated insurance solutions in the UK for pensions de-risking. They help companies, pension schemes, and insurers manage their pension and annuity liabilities by insuring their obligations. Their clients include Asda, National Grid, Cadbury’s, Prudential, British Airways, and Zurich Assurance. Rothesay Life currently has assets under management of £56bn and insures the pensions of over 800,000 individuals.
Rothesay specialises in buying up old books of life insurance businesses from companies that no longer want them. They take over corporate pension schemes through buy-ins and buyouts. A pension buy-in is a bulk annuity contract that covers the same as all of the benefits for a subset of the scheme members. It protects the scheme against increases in the longevity of covered beneficiaries. A buy-out is the most common approach to permanently settling pension liabilities; a bulk annuity that covers 100% of scheme benefits is split up into individual annuity policies for each pension member.
“I am delighted that GIC and MassMutual will be substantially increasing their investment in Rothesay. " - Addy Loudiadis, Chief Executive Officer of Rothesay Life
Synergies
Rothesay Life has transformed immensely since Blackstone, GIC & MassMutual’s initial investment in 2013 with its assets under management growing from £7.5B to £56B. GIC and MassMutual have already been exceptionally successful in helping Rothesay grow their business into a market leader. The bulk annuity market in the UK has been growing significantly in recent years as companies are looking to offload the risk of operating such schemes, which pay a fixed income to retired staff for life. Rothesay plans to continue to differentiate itself by offering a full range of innovative solutions on a large scale and taking advantage of strategic prospects with a value and risk-driven approach to underwriting. MassMutual and GIC’s substantial increase in their investment in Rothesay Life shows that they remain confident in the company and are keen to continue to build their long term relationship with Rothesay Life. MassMutual and GIC will add value to Rothesay as it pursues strengthening its leading position in pension de-risking solutions.
The sale comes after Rothesay booked £16.3 billion worth of new businesses underwritten for their services. After expanding their pension solutions services to even the UK airline industry, it provides another stream of profits for GIC and MassMutual to gain from as it is a new asset class in itself.
Risks & Uncertainties
The sale of Blackstone’s stake comes weeks before Rothesay Life intends to go to the Court of Appeals in the UK to push through one of its biggest-ever deals. In August 2019, a UK High Court Judge took quite an unexpected step by blocking the proposed transfer of £12B annuities from Prudential to Rothesay Life, thereby raising several questions about the potential of other big life insurance deals. The reason for the judge’s decision was that Rothesay did not have the same heritage or diversification as the 171 years old prudential as it was a “relatively new entrant without an established reputation in the business.” This development certainly brings some uncertainty about the future prospects of sizable closed book deals between insurers which could possibly reduce the number of transactions taking place in the future. Rothesay Life and M&G (owners of Prudential’s UK business) are appealing against the decision, and the case is due to be heard in late October. Blackstone choosing to offload their majority stake in Rothesay Life could be a comment on their lack of belief in the future of Rothesay Life as well as the insurance market in the UK. However, the support from highly acclaimed GIC and MassMutual may prove that the best is yet to come for Rothesay.
“We have confidence in Rothesay’s long-term prospects given its highly capable management team and strong risk management practices." - Yong Cheen Choo, Chief Investment Officer of Private Equity, GIC