Private Equity Firms Keep Eating U.S. Life Insurers

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.

Private equity firms, meanwhile, like the predictable and steady returns they can get by investing in issuers of life insurance and annuities, the analysts write.

The Holdings

U.S. life insurers as a whole ended 2020 with $4.9 trillion in cash and invested assets, up 7.2% from the total at the end of 2019.

Private equity firm-controlled life insurers accounted for 9.6% of U.S. life insurer assets in 2020, up from 7.4% of U.S. life insurer assets the year before.

Like other U.S. life insurers, private equity firm-controlled life insurers tend to invest heavily in bonds, bond-like arrangements, cash, cash equivalents.

The Capital Markets Bureau analysts found that bond, cash and cash equivalents accounted for 80% of private equity firms’ U.S. life insurance company assets in 2020, up from 79% a year earlier.

Here’s what happened to private equity firm-owned life insurers’ holdings of key types of assets between the end of 2019 and the end of 2020:

• Bonds: $351 billion (up 40%)
• Mortgages: $45 billion (up 24.5%)
• Cash and Short-Term Investments: $26 billion (up 52%)
• Private Equity, Private Debt, Limited Partnerships and Other “Alternative Investments”: $22 billion (up 30%)
• Common Stock: $11 billion (up 28%)

One noticeable difference between private equity firm-controlled life insurers and other life insurers is the former have had more asset-backed securities in their bond portfolios, the Capital Markets Bureau analysts report. But, in 2020, these firms tilted more toward use of ordinary corporate bonds.

The private equity firm-controlled life insurers increased their holdings of ordinary corporate bonds by 50%, to $174 billion, while letting holdings of asset-backed securities increase just 30%, to $90 billion.

The share of private equity firm-controlled life insurers’ assets held in asset-backed securities fell to 25%, from 27%. The share of the assets held in municipal bonds, which help states and cities build roads, airports and train sewers, increased to 6.6%, from 5.7%.

The Private Equity Owner Difference

Insurance regulators still wonder what, if anything, the rise of private equity firms as life insurance company owners means.

Private equity firm owners believe they can earn better investment returns than other life insurers. One concern, the Capital Markets Bureau analysts write, is that private equity firms could achieve those higher returns by shifting toward riskier assets.

Nevertheless, no matter who owns a U.S. life insurer, “investment activity must abide by applicable state insurance laws,” the analysts write.

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