State Lawmakers Troubled by Private Equity's Growing Stake in Life & Annuity Assets

What You Need to Know

Private equity funds and similar types of investors controlled or are in the process of acquiring control of, about $620 billion in U.S. life and annuity assets.
A Johns Hopkins professor who once ran a private equity fund said the funds might take a little too much risk and enjoy too much secrecy.
A reporter who has covered the funds noted that some have rescued life insurers that ran into problems while owned by traditional owners.

State lawmakers are wondering what they should think about the growing role of private equity fund owners in the life insurance and annuity sector.

Members of the National Council of Insurance Legislators, a group for state lawmakers with an interest in insurance, recently held a well-attended session on the private equity ownership issues today, at an NCOIL meeting in Jersey City, New Jersey.

McKinsey consultants reported in February that private equity funds and similar types of investors controlled, or were in the process of acquiring control over, about $620 billion in U.S. life and annuity assets, or 12% of U.S. life and annuity assets, according to Kentucky state Rep. Joe Fischer, a Republican, who presided over the private equity fund session.

NCOIL members and others have different views about whether private equity fund ownership is any different than any other form of ownership, Fischer said.

California Assemblymember Ken Cooley, a Democrat who serves as NCOIL’s president, recalled watching what had once been a little-noticed investment strategy — building up a big portfolio of below-investment-grade bonds — kill California’s largest life insurer, Executive Life, in 1991.

Focusing on below-investment-grade bonds “looked like a good option, until it was not,” Cooley said.

Now, Cooley said, state lawmakers have to look at the private equity fund ownership issue carefully, to make sure they understand it and avoid surprises.

“This puts us as lawmakers all front and center,” Cooley said.

Connecticut state Rep. Stephen Meskers, a Democrat, said he wants to review allegations that the private equity fund deals might be moving blocks of annuity and long-term care insurance business from strong insurers to less-credible insurers, and that the less-credible insurers might be more likely to fail.

He suggested that the deals might surprise the customers who bought the annuities and LTCI policies involved in the deals.

“I’m not investing in a venture capital fund when I buy an annuity,” Meskers said.

A Primer on Private Equity Funds

Jeffrey Hooke, a Johns Hopkins business school lecturer who was once the director of a $5 billion emerging markets private equity fund, gave NCOIL members a briefing on private equity fund basics.

Hooke told attendees that a private equity fund is an investment fund that invests in companies that are not subject to the SEC reporting requirements and other requirements that apply to companies that have shares of stock in the hands of large numbers of ordinary outside investors.

The managers of a private equity fund usually lock the investors’ money in for 10 years, and they typically try to sell and collect profits within about six or seven years, he said.

Hooke said a private equity fund is similar to a hedge fund but tends to differ in several ways.

A hedge fund will invest in a higher percentage of publicly traded securities and other liquid investments, and return investors’ money upon request within about six months, Hooke said.