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Analysts Look Inside Private Equity-Owned Insurers’ Vaults

Allison Bell By Allison Bell

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What You Need to Know

  • Elizabeth Warren, D-Mass., and some other senators have questioned whether increasing private equity ownership of life insurers is a good thing.
  • U.S. life insurers that are owned by private equity firms hold more alternative assets than other life insurers, which some analysts worry could make them more vulnerable to risk and volatility.
  • The largest share of private equity-owned life insurers' bond holdings are in high-grade corporate bonds, just as they are at other life insurers.

U.S. life insurers that are owned by private equity firms hold more alternative assets than other life insurers, but, overall, their bonds have high ratings, according to analysts at the National Association of Insurance Commissioners.

Analysts Jennifer Johnson and Jean-Baptiste Carelus found that private equity-owned life and annuity issuers’ total investment holdings fell 4.5% between Dec. 31, 2020, and Dec. 31, 2021, to $450.1 billion.

Bonds accounted for $312 billion — or 69% of the investment holdings — but that amount was down 11% from a year earlier.

The value of the private equity-owned life insurers’ mortgage holdings increased 31% to $59 billion.

Alternative asset holdings, which insurers list on a form called Schedule BA, increased 22% to $27 billion.

For more details about what happened to insurers’ assets in 2021, see the table below.

What It Means

The portfolios of some closely watched institutional investors tilted more towards mortgages and alternative assets last year and away from ordinary bonds.

One question might be how shifts in life insurers’ portfolios affect a client’s true asset-allocation picture, once the nature of the assets inside life insurance policies and annuity contracts are taken into account.

Private Equity-Owned Firms

Traditionally, financial services companies have applied the term “private equity firm” to companies that focus on buying and holding other, privately held companies’ stock.

The NAIC — a group for state insurance regulators — is still developing a definition of “private equity owned.”

The analysts note that they came up with a private, proprietary list of private equity-owned life insurers by looking at information in insurers’ “investment schedules,” or regulatory filings, and by talking to state insurance regulators and using other sources.

Because of the complexity involved with counting private equity-owned life insurers, “the number of US. insurers that are PE-owned continues to evolve,” Johnson and Carelus write.

The Numbers

The analysts based their new private equity-owned life insurer review on the annual statements life insurers file with state insurance regulators.

The analysts provided data on private equity-owned life insurers for some indicators, and data on all insurers for other indicators.

The Controversy

Some private equity firms have been buying and holding life insurers for decades, but the volume of private equity-driven deals has increased over the past 10 years, in part because of life insurers’ hunger to escape from the pressure of low interest rates, and in part because other types of investors see backing the deals as a way to improve their own returns.

The private equity firms say that they can use their teams to get life insurers more capital and higher investment returns.

One concern is that “investments could shift toward higher-returning, higher-risk and less liquid assets that are potentially more volatile,” the analysts write. “The NAIC Capital Markets Bureau will continue to monitor trends in PE-owned U.S. insurer investments and report as deemed appropriate.”

Alternative Assets and Increased Risk

One sign that private equity-owned life insurers are taking a little more risk is that their holdings of “Schedule BA and Other,” or alternative assets, increased by $4.9 billion during the year ending Dec. 31, 2021.

But the largest share of private equity-owned life insurers’ bond holdings are in high-grade corporate bonds, just as they are at other life insurers, and Schedule BA assets accounted for only 6% of assets. The share of assets recorded on Schedule BA is about the same as it was a year ago, the analysts say.

Similarly, private equity-owned life insurers put a higher percentage of their bond portfolios in asset-backed securities than other insurers do, but the NAIC analysts say the average credit ratings of the issuers of the private debt, private equity and other securities in those bond portfolios are high.

Scrutiny from Capitol Hill

NAIC data on private equity-owned life insurers could get extra attention on Capitol Hill. Sen. Elizabeth Warren, D-Mass., and some other senators have questioned whether increasing private equity ownership of life insurers is a good thing.

Sen. Sherrod Brown, D-Ohio, asked at a Senate Banking, Housing and Urban Affairs hearing earlier this month whether workers might be at increased risk if their employer-sponsored pensions were transferred to private equity-owned life insurers through pension risk transfer arrangements.

Warren has introduced a bill, S. 3022, the  Stop Wall Street Looting Act, which could cool the private equity market. Brown is one of the S. 3022 co-sponsors. The other sponsors are Sens. Tammy Baldwin, D-Wis., Jeff Merkley, D-Ore., and Bernie Sanders, a Vermont independent who causes with the Democrats.

Top 5 Asset Classes at Private-Equity-Owned Life Insurers

Asset Class Value on Dec. 31, 2021 (in billions) Change from Dec. 31, 2020, total
Bonds   $312 -11.1%
Mortgages   $59 31.1%
Alternative Investments  $27 22.1%
Cash & Short-term Investments   $25 -3.8%
Common Stock   $11 1.9%
Source: “Private Equity (PE)-Owned U.S. Insurers’ Investments Decrease as of Year-End 2021; Number of PE-Owned U.S. Insurers Increases.” (National Association of Insurance Commissioners’ Capital Markets Bureau)

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Allison Bell

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