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Private Equity Firms May Squeeze Insurers in New Ways: Regulation Analyst

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What You Need to Know

  • Kolchinsky said private equity owners focus more on investments in asset-backed securities.
  • He said private equity owners now put more emphasis on generating fees than on restructuring companies.
  • He suggested that relationships between the affiliates involved are not always clear.

An insurance regulation expert says he and his colleagues may have to focus on new concerns when they look at insurers owned by private equity companies.

Eric Kolchinsky, the director for structured securities and capital markets, talked about private equity firm ownership of insurers at a recent online meeting of the National Association of Insurance Commissioners’ Financial Stability Task Force, according to a packet of meeting materials posted on the task force section of the NAIC’s website.

Eventually, the work of Kolchinsky and his colleagues could affect how PE firms operate in the insurance sector. PE firms now own or control 177 insurers, according to NAIC records, Kolchinsky said.

A private equity firm invests in companies that do not have enough shareholders to be classified as “publicly traded” under federal law.

Bond Holdings

Insurers get much of the cash they use to pay claims by investing premium payments. For regulatory and other reasons, insurers tend to focus on  bonds and similar investment instruments.

One finding from an NAIC analysis of PE-owned insurers is that asset-based securities investments make up about 25% of the PE-owned insurers’ bond holdings, Kolchinsky said. That compares with asset-backed securities making up just 10% of the bond holdings at other insurers analyzed.

Investment Company Affiliates

Kolchinsky said some PE owners may use a different strategy to extract excessive value from an insurance company subsidiary than some stock company owners and some executives of policyholder-owned mutual insurers have used to squeeze out excessive value.

More on this topic

Traditionally, he said, regulators have looked for signs that the parent company of an insurance company subsidiary was pulling out too much cash in the form of dividends, or signs that the top executives were paying themselves too much.

Today, he said, regulators have to watch for signs that a PE company owner is making an insurance company subsidiary pay high fees to other companies that the PE company owns.

One possible concern is that a PE-owned insurer might be paying an investment company with ties to the same PE firm via collateralized loan obligations (CLOs) or other investment vehicles, Kolchinsky said.

It is sometimes difficult to determine whether CLO holdings created by related companies come from related companies, he added.

Kolchinsky suggested that one solution would be for regulators to update the rules insurers use to classify and report transactions with related entities.

Clarification: Eric Kolchinsky is a staff member at the NAIC who works on regulation of insurers. His role was described incorrectly in an earlier version of this article.

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