Life insurance – the uncertain private equity future

Assuming pending deals close, McKinsey said at the time, private investors were set to own 12% of life and annuity assets in the US – or $620 billion’s worth.

The foothold represents more than a third of US net written premiums of indexed annuities, while all five of the largest PE firms had life insurance holdings of 15% to 50% of their total assets under management, according to McKinsey.

The number of PE-owned US insurers had hit 117, up from 89 the year before, at the end of 2020. This is according to the NAIC Capital Markets Bureau, which said most of this cohort were life insurers.

Low interest rates have meant insurers dealing with products “not designed to perform well in a low-rate environment” have sought outside help, according to an Oliver Wyman report, and this has meant boom time for PE.

With rates now on the up there are question marks over whether this M&A rush will continue apace or start to drop off.

Across life insurance, not just for businesses tied to PE or courting private capital, interest rate increases are “bound to shake things up”, according to Morgan Tilleman, partner at Foley & Lardner.

“Right now, whether that draws more investment in, or has the opposite effect? Honestly, if I knew the answer to that question, I would do something else with my professional time and energy and try and retire a little bit earlier,” Tilleman said.

Challenges and strategy

Buying a life insurer is not easy, and principals of PE firms may face challenges from both a process and “philosophical” perspective, he said.

Reporting information provisions are “relatively invasive” compared to what they may be typically used to.

“There’s real conflict between the amount of disclosure required by the states and the desire for secrecy,” said Tilleman.

Regulatory eyes are trained on the market, as are those of other stakeholders.

State regulators are worried about possible “conflicting time horizon interests” between policyholders and PE owners, Tilleman said, and whether PE owners will take a long-term strategy or look out for themselves in the short term.

There are also concerns that PE owners could be investing in affiliated securities or investments in a bid to generate profit for themselves.

“The regulators claimed to have identified some kind of a pattern here where private equity owned life insurers today, or privately held insurers today, engage in this behavior more, or to a greater extent than other insurers,” Tilleman said.

Collateralised loan obligations (CLOs), which are primarily made up of loans to large corporations syndicated by banks, were flagged as a particular area of potential concern by the National Association of Insurance Commissioners (NAIC) in a May 31 letter.

This, the NAIC said, is because they can carry more credit and liquidity risk, or be more complex than is typical.

Some PE life insurers look to CLOs, seen as a more “aggressive investment” strategy than typical for the industry. Although such investments are growing, the asset class represented just 2.6% of total cash and invested assets at the end of 2020, according to the NAIC.

The NAIC said it could “certainly appreciate the apprehension of those retirees or future retirees when they see their retirement security being transferred from their employer to an insurance company they might have no relationship with.”

However, it said that state regulators exist to make sure that organisations “will be there to honor those commitments, regardless of its ownership structure.”

Concerns

The association was responding to Senator Sherrod Brown, chairman of the US Senate Committee on Banking, Housing, and Urban Affairs.

Brown had said he feared life insurance was being bought up by “risky companies” – concerns that have been echoed by others.

“In general, steps need to be taken to prevent the possibility that billionaire PE firm partners will further enrich themselves at the expense of holders of life insurance and annuity policies,” a January 2022 Center for Economic and Policy Research report, titled Beware of Private Equity Gobbling Up Life Insurance and Annuity Companies, said.

Most fears center around full throttle acquisitions of life insurance businesses, but capital is also flowing in through reinsurance structures, with options such as side cars and bonds allowing investment that does not require the purchase of an insurer.

“It’s been very productive for the industry to be able to access private capital, and there’s just so much of it, and it’s such a significant part of the overall capital markets,” Tilleman said.

“Frankly, it helps to put insurers on a level playing field with other providers of financial services, who have always been able to access private capital – and it’s been overwhelmingly good for the industry.”

And despite some controversy, “it is not at all certain” that the sector will see any changes in regulation around PE ownership. COVID delays have hampered any could-be progress on this, according to Tilleman.

“We’re all hopeful that we’ll get to where things are getting back on track in a sense, and this is an area where – if there’s going to be regulatory change – we will hopefully start to learn about what it might be,” he said.