$1.98B deal to nearly double size of PE-backed acquirer's US life group

The conclusion of National Western Life Group Inc.'s review of strategic alternatives will provide a substantial lift to an acquirer that had already been growing rapidly through both organic and inorganic means.

➤ Prosperity Life Group's S.USA Life Insurance Co. Inc. agreed to acquire National Western Life in a transaction S&P Global Market Intelligence values at $1.98 billion. The deal marks Prosperity's first traditional stock purchase agreement since its formative acquisition of the former Advanta Life in 2010, but not for lack of effort: its attempt in late 2022 to acquire American Equity Investment Life Holding Co. for $3.9 billion did not succeed.

➤ S.USA Life, SBLI USA Life Insurance Co. Inc. and Shenandoah Life Insurance Co. Inc., the current US-domiciled, non-captive life units of Prosperity Life, had total net admitted assets of $11.79 billion as of June 30. The combination of National Western Life Insurance Co. and Ozark National Life Insurance Inc. had total net admitted assets of $10.84 billion as of the same date. On a pro forma basis, the US-domiciled subsidiaries of National Western and Prosperity would have ranked as the 68th-largest life and fraternal entity using year-end 2022 asset size, versus 76th and 78th, respectively, as originally reported.

➤ The agreement continues the trend of private equity-backed entities expanding their US life and annuity market presence. Assuming completion of the deal, we estimate that nearly one-quarter of the 69 largest US life groups and fraternal benefit societies based on year-end 2022 statutory assets are or will be backed by private equity. An investor group comprised of funds advised by Elliott Management Corp., insurance operators and investors from Wand Partners Inc. gained control of Prosperity through a January 2019 acquisition.

Prosperity will fund the all-cash transaction, as disclosed in an Oct. 9 release, through internally generated cash, a capital commitment of an undisclosed amount from Elliott affiliates and borrowings under existing facilities. The parties expect the deal to close in the first half of 2024, subject to regulatory and shareholder approvals. Prosperity is represented by Citi as financial adviser and Debevoise & Plimpton LLP as legal counsel. National Western, which initiated the strategic review in May, is receiving financial advice from Goldman Sachs & Co. and legal counsel from Sidley Austin LLP.

The deal marks a significant milestone in the operating plan that new ownership outlined for Prosperity in the Form A filed with the Virginia State Corporation Commission connected with the 2019 acquisition. That plan called for the generation of gradual organic growth through the expansion of distribution for Prosperity's existing middle-market-focused protection, asset accumulation and supplemental health products along with the pursuit of strategic M&A and reinsurance deals.

From an organic standpoint, Prosperity's US life companies (excluding Arizona captive Procap Life and Annuity Reinsurance) experienced dramatic increases in production in the first three full years of its new ownership. Direct premiums and considerations of $2.19 billion in 2022 marked an increase from only $352.1 million in 2019, with ordinary individual annuities accounting for most of the expansion.

While Prosperity completed sponsored demutualizations of the then-rehabilitating Shenandoah Life in 2012 and SBLI USA in 2014, its inorganic expansion under current ownership has largely focused on block reinsurance deals.

The group established a class E Bermuda reinsurer known as Prosperity Life Assurance Ltd., which ended 2022 with $4.07 billion in total liabilities. US counterparties reported an aggregate reserve credit of $3.67 billion associated with Prosperity Life Assurance arrangements, including $2.01 billion linked to its 2021 assumption of certain deferred and immediate annuities from Global Atlantic Financial Group Ltd.'s Commonwealth Annuity & Life Insurance Co. and $1.33 billion from a cedant in National Western that it now plans to acquire outright.

Block reinsurance combined with organic growth to fuel a near-doubling in the Prosperity US life group's net statutory assets during the 18-month period ended June 30, 2023. S.USA Life alone experienced a $5.01 billion, or 330.9%, increase in assets during that span, which included its 2022 agreement to assume certain individual life and annuity business from Securian Financial Group Inc.'s Minnesota Life Insurance Co. S.USA Life added $2.07 billion in general account assets from that transaction net of an associated retrocession.

In National Western's case, Chairman, President and CEO Ross Moody said in his 2022 annual shareholders letter that management pursued the Prosperity reinsurance pact given their perspective that the company was "burdened" by a legacy block of in-force fixed and payout annuities backed by an investment portfolio with yields they deemed "insufficient to meet the Company's profitability requirements."

Although the transaction allowed National Western to "recoup capital space … to operate with," Moody said, the company faced pressures on the pricing and profitability of its new business in an environment highlighted by the increased life insurance business role of "financial firms" such as Apollo Global Management Inc., Ares Management Corp., Goldman Sachs Group Inc. and Brookfield Asset Management Ltd. As a result, National Western entered a flow reinsurance agreement in 2022 with the Ares-backed Aspida Life Re Ltd. in a quota-share arrangement intended to allow the cedant to retain its market position.

"We eventually concluded that we would not be able to offer competitively priced products without the assistance of external investment expertise," Moody said.

Now, National Western is poised to become part of the growing ranks of private equity-backed insurers led by the likes of Apollo's Athene Holding Ltd., KKR & Co. Inc.'s Global Atlantic, The Carlyle Group Inc.'s Fortitude Group Holdings LLC and Brookfield Reinsurance Ltd. The latter entity has been particularly active from an M&A standpoint, most recently entering a $4.3 billion deal to acquire American Equity months after Prosperity withdrew its bid.

"While we continue to be a viable and profitable business, there is a sense that a door is closing behind us as we transition to a different future than what we may have imagined just a few years ago," Moody wrote in the letter.

In announcing the Prosperity deal on Oct. 9, Moody said it "provides clear and immediate value for our stockholders at an attractive premium."