What You Need to Know
- A private equity firm typically invests in companies or buys corporate stock that's not listed on a public stock exchange.
- The NAIC has seen private equity firms' insurance company holdings growing steadily over the past decade.
- Private equity-owned life insurers tend to hold more asset-backed securities than other life insurers do.
Very hungry financial caterpillars — private equity firms — continued to gobble up U.S. life insurance company investment assets in 2020. It’s still unclear to insurance regulators exactly what this means.
Analysts at the Capital Markets Bureau, an arm of the National Association of Insurance Commissioners, say private equity firms controlled a total of $471 billion in U.S. life insurance company cash and invested assets at the end of 2020.
That was up 39% from the total at the end of 2019.
Private equity firms’ U.S. life insurance company assets increased just 9.4% between 2018 and 2019.
The growth in assets at private equity firm-controlled life insurers was due partly to acquisitions and partly to individual life insurers’ own growth.
Inside Private Equity
The typical U.S. life insurer is “privately held,” meaning that it’s owned by an individual, a family, or a small group of unrelated partners or shareholders.
Some “mutual life insurers” are owned by their own policyholders.
A “publicly traded life insurer” is owned by a large group of stockholders and its stock is traded on an exchange such as the New York Stock Exchange. In the United States, those companies have to feed detailed reports about their activities into the SEC’s Edgar company report database.
Private equity firms are companies that manage investment on behalf of what federal law classifies as sophisticated investors, such as pension funds, endowments, wealthy individuals and insurers.
Federal law exempts private equity funds from the kinds of detailed reporting requirements imposed on publicly traded insurers or retail mutual funds, based on the assumption that the private equity fund investors are sophisticated players. Private equity funds typically hold on to investments for the long term, meaning that they appeal to sophisticated investors that are willing to buy and hold.
Private equity firms’ insurance company holdings have become a force in the past decade, partly because of a long-lasting drop in interest rates, according to Jennifer Johnson and Jean-Baptiste Carelus, the authors of the Capital Markets Bureau report.
Life insurers use investments in high-quality corporate bonds and other low-risk investments to support life and annuity obligations. Low interest rates hurt life insurers’ ability to earn solid profits on attractively priced life and annuity products.