Financial authorities want to know more about whether surging private-equity investment in the insurance sector poses risks to the broader economy.
In recent weeks, the Financial Stability Oversight Council—a U.S. Treasury Department panel formed to protect the financial system—and the International Monetary Fund both released reports questioning whether private-equity control of insurance companies makes the financial system less stable.
Their comments address a sea change in the insurance business. Over the past decade, alternative asset managers have plunged into the business and now oversee a significant portion of life insurance and annuity assets in the U.S. Linking up with an insurer provides buyout firms a steady stream of asset-management fees.
These relationships can also be attractive to insurers. More than a decade of low interest rates made it difficult for insurers to earn enough money through a traditional mix of corporate and government bonds to meet their obligations to policyholders, while also generating returns to investors. Private-equity firms can invest insurers’ money in private loans that earn higher yields than plain-vanilla credit instruments.
But these relationships have drawn criticism from some regulators and lawmakers, who worry that private-equity firms may be taking too much risk with ordinary people’s nest eggs, leaving them exposed at vulnerable moments in their lives. Now, the FSOC and IMF are wondering whether private equity’s insurance deals might also be a threat to the financial system as a whole.
In a Dec. 19 report, IMF researchers said private-equity firms typically ramp up the level of investment risk once they take control of an insurance company. Co-authors Fabio Cortes, Mohamed Diaby and Peter Windsor said insurance supervisors must determine whether troubles at a private equity-backed insurer could create “contagion to other parts of the financial system” and the real economy. They urged global insurance authorities to analyze and report on the trend toward private-equity involvement in the insurance sector.
Just a few days earlier, the FSOC issued a similar call, asking insurance overseers to evaluate how private-equity involvement in the sector—along with other long-term changes to the industry—could play into systemic risk.
The panel, an interagency group led by Treasury Secretary Janet Yellen, recommended that the Federal Insurance Office and the National Association of Insurance Commissioners evaluate how private-equity investment affects the stability of the financial system.
The FSOC said it supports the ongoing efforts of the NAIC, which sets standards for state insurance regulators, to assess the additional risks from private equity-linked insurers’ investments in complex assets.
The use of such investments “elevates liquidity and complexity risk and raises questions about the quality of assets” being acquired, the FSOC wrote.
Advocates for the private-equity industry say those concerns are overblown.
“Insurers, whether publicly traded or privately held, are subject to the same stringent regulation. And as investment managers, private-capital firms have a long history of successfully managing insurance capital to deliver strong performance for policyholders,” said Drew Maloney, president and chief executive of the American Investment Council, a trade group for private-equity firms.
In a letter last year to the NAIC, the group wrote that there is a “natural alignment” between insurers and private-capital firms, in that both have a long-term investment perspective, and that private-equity firms can help insurers out of the low-interest-rate trap by investing their assets in ways that offer better returns without taking on additional risk. The Washington-based trade group also said regulators already have the necessary tools to protect the health of insurers.
Private-equity investment has dramatically changed the life insurance and annuity business over the past decade. By 2022, buyout firms owned 137 U.S. insurance companies with $534 billion in assets, about 6.5% of the entire U.S. market, up from 90 insurers and $314 billion in 2018, around 4.8% of the market, according to NAIC data. For competitive reasons, firms not owned by private equity are under pressure to seek out its investment.
Apollo Global Management pioneered the insurance strategy through its 2009 creation of Athene Holding, which grew to become one of the largest U.S. sellers of annuities. Blackstone, KKR, Ares Management, Carlyle Group and Brookfield were among the large asset managers that followed Apollo’s lead, either by buying insurers or reinsurers outright or making substantial investments in them. These five firms have made or announced at least nine major insurance investments since 2020.
Given this level of investment, scrutiny of the private-equity insurance strategy is “totally appropriate,” said Patrick Woodall, a senior fellow at Americans for Financial Reform, a Washington nonprofit group that advocates for stronger checks on Wall Street firms.
“The increased scrutiny is a recognition that private equity-owned insurers pose risks not just to policyholders, but to the broader financial system,” Woodall said.
Insurers owned by private equity are particularly risky due to their concentrations of complex assets as well as their use of insurance assets to fund buyouts, AFR said in a new report. For instance, about 10% of the bond investments by U.S. private equity-linked insurers last year were transactions with affiliated entities, the AFR report said citing NAIC data.
The report also underscored the possibility of systemic risk in private-equity insurance deals. Patchwork U.S. insurance regulations—with no federal regulator, the industry is overseen by state authorities—are “no match for the complex, opaque and risky financial transactions that private-equity ownership is bringing to the insurance industry,” the report says.
Americans for Financial Reform urged the FSOC to consider designating private equity-owned insurers as “structurally important,” which would bring them under Federal Reserve supervision.
Private equity-linked insurers “are shifting assets from staid, more traditional investments to riskier, more opaque, more complex and more illiquid ones. That combination raises concerns,” said Woodall.