Private equity in life insurers draws new round of critical reporting – Insurance News

Private equity firms continue to stalk takeovers of insurance companies, and critics say the potential for financial disaster is growing along with the trend.

Americans for Financial Reform, a Washington-based nonprofit that advocates for tighter regulation of Wall Street firms, is the latest group to raise alarm about what it sees as risky private equity investment in policy funds.

The AFR’s new research is the result of its analysis of the relationship between private equity and public pension funds, said Andrew Park, the group’s senior policy analyst. The impact of PE on pensions is already understood, he explained.

“What has been less understood is how much of this new capital that private equity is getting is coming from acquiring insurance companies, and then the insurance companies in turn are buying up a lot of the assets that private equity is getting,” he added. “It’s almost like you have this crowdfunding scheme that’s set up now with private equity and insurance.”

By the second half of 2023, private equity firms owned $774 billion in life insurance assets, or 9% percent of the life insurance industry, according to insurance analyst AM Best. Similarly, PE firms are estimated to manage $5.7 trillion in global assets, giving these firms ample opportunity to buy even more insurance companies, the AFR notes.

The AFR report, Risky Business: The Life Insurance Gambit of Private Equity, comes amid increasing pressure on private equity firms to submit to stricter oversight. In the past month, the Financial Stability Oversight Board and the International Monetary Fund have released their own reports questioning private equity’s control over insurers.

The FSOC is a Treasury Department panel formed to assess and mitigate risks to the financial system. The three reports reach similar conclusions: regulators need to step up and better oversee the private equity and insurance funds they oversee.

“An area of ​​focus is the increased allocation of investments by insurers to complex structured securities such as [collateralized loan obligations]and assessing whether regulators have the appropriate tools in place, as well as a supervisory and capital framework, to effectively protect policyholders from insurers’ investment risk,” the FSOC report said.

Aon study: no greater risk

The American Investment Council pointed to a 2022 study commissioned by Aon Inpoint, in which the consultant reviewed the investment trends of insurers owned by alternative asset managers. Alternative asset management is a broader term for private equity firms.

The study acknowledges the mortgage-backed securities default that precipitated the financial crisis of 2008-09. However, today’s asset-backed securities [ABS] they don’t come with the same risks, Aon’s research notes, and have default rates comparable to or lower than similarly rated corporate bonds.

Looking at investments from the years 2010, 2015 and 2021, Aon’s study concluded that AAM-owned insurers “sustained a similar level of credit risk to non-AAM-owned insurers, despite different ABS concentrations and corporate bonds’.

“As investment managers, private equity firms have a long history of successfully and safely managing insurance capital to deliver good outcomes for policyholders,” said Drew Maloney, CEO of AIC. “Insurers, whether publicly traded or privately held, are subject to the same strict regulation.”

A pot of gold for private equity

The buzz around private equity buying insurance dates back to the 2008 financial crisis, but has picked up steam in recent years. At the end of 2022, private equity firms owned 137 U.S. insurance companies with $533.7 billion in assets, representing 6.5 percent of total U.S. insurance assets, according to data from the National Association of Insurance Commissioners.

Private equity’s hunt for insurance assets includes Wall Street’s biggest names. In a 2021 deal, Global Atlantic Financial Group was acquired by global investment firm KKR & Co. for $4.4 billion.

Other huge deals saw Apollo combine with Athene and Blackstone, buying 9.9% of AIG’s life and retirement business as part of an ongoing, longer-term relationship.

As the deals got bigger, regulators and consumer advocates became more concerned. If policyholders’ funds are at greater risk, it could lead to a chain disaster for the entire financial system, Park said.

“Insurance companies are closely interconnected with the wider financial system – as investors, counterparties, lenders and underwriters – so failing insurance companies or sector-wide losses from common insurance investment strategies can reverberate throughout the economy and create systemic financial risks.” , the AFR reads.

Secured credit obligations

One riskier investment area that affects groups like AFR is collateralized loan obligations, or CLOs. A CLO is a single security backed by a pool of debt. They are often secured by low-credit corporate loans or loans taken out by private equity firms to carry out leveraged buyouts.

McKinsey reported that 80% of private equity-owned insurers have shifted their investments to subprime securities, particularly CLOs. Private equity insurance investments in CLOs have tripled over the past five years, from $4.3 billion in 2018 to $12.9 billion in 2022, and represent a growing share of bond investments, the NAIC said.

A year ago, the NAIC changed its rules to tie CLO capital charges to NAIC’s own modeling rather than CLO ratings. Regulators did this to eliminate a mismatch in the rules that caused insurers to hold less capital against CLOs than against the underlying loans that CLOs hold.

In recent years, NAIC regulators have increased oversight of PE involvement in life insurance. This work is centered in the Macroprudential Working Group, which adopted a list of “13 considerations” applicable to PE-owned insurers.

“The state’s insurance solvency framework includes significant checks and balances to protect policyholders, including many public and non-public disclosures and legal requirements, and these are used to assess risks for all insurers, regardless of ownership,” the NAIC said in statement in October to InsuranceNewsNet. “Private equity ownership of insurers is not new; state insurance regulators adopted new regulatory guidelines in 2013 to identify and address the various risks to PE owners.

“What is new is the volume of such transactions and the increased complexity of investments for most insurers in general.

Call to action

State insurance regulators have been reluctant to cede any oversight responsibilities to the federal government. Continued attempts by federal regulators to collect climate data and regulate annuity sales have met with repeated resistance from the NAIC and its members.

Putting aside these battles is imperative to responsible regulation of private equity control over insurance companies, Park said.

“There is no single regulator that is responsible for looking collectively at how the activities of insurance companies pose threats to the entire financial system,” he explained.

The AFR proposes several reforms to address the management of insurers’ private capital.

“State insurance commissioners should strengthen oversight of private equity-owned insurers by imposing and strictly enforcing quantitative caps on related transactions, improve disclosure and pre-approval of related transactions, limit asset management fees that private equity firms charge to its insurance portfolios, and raise capital reserve requirements on riskier holdings of non-investment grade insurers and on structured notes, including treating insurers’ holdings of CLOs more similarly to how it treats holdings of underlying leveraged loans.” , the report recommends.

Likewise, the group supports giving federal regulators the power to designate insurance companies as “systemically important financial institutions,” which would put them under the direct oversight of the Federal Reserve Board of Governors.

“The rise of private equity-owned insurers could pose real risks to policyholders and even the broader economy as private equity firms shift stable insurance portfolios into riskier investments,” said Patrick Woodall, senior fellow in AFR. “If private equity-owned insurers’ losses increase, they may be unable to meet their obligations, and policyholders may lose some of their savings or face years of delay in paying claims if their insurer went bankrupt.’

InsuranceNewsNet Senior Editor John Hilton has covered business and other events in more than 20 years of daily journalism. John can be found at [email protected]. Follow him on Twitter @INNJohnH.

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