Private Equity Interest In Insurance Will Remain Strong, Speaker Says

TAMPA--Private equity firms will continue to hunt out insurance company acquisitions despite growing regulator concerns, a panelist said Tuesday.

The reasons are obvious, said Rosemarie Mirabella, director, rating analytics, for AM Best Research: there's plenty of money to be made.

"The only way it would not continue is if there were major fundamental shocks," said Mirabella, a panelist at the 2022 Life Insurance Conference, sponsored by LIMRA, LOMA, Society of Actuaries and the American Council of Life Insurers.

Private equity firms are seeing a nice return on insurance investments, Mirabella noted, and are nicely positioned to take advantage of the gradual uptick in interest rates expected this year and next.

Private equity firms have helped large legacy companies by buying their closed blocks of business, such as Principal Financial selling its fixed annuity and universal life business to the investor Sixth Street in a recent $25 billion deal. The money will help Principal delve into more profitable businesses, such as group benefits.

Last year saw a flurry of mergers and acquisitions, including huge deals such as Apollo combining with Athene and Blackstone buying a 9.9% chunk on AIG’s Life & Retirement business as part of an ongoing, longer-term relationship.

According to the latest NAIC Capital Markets Special Report, private-equity firms owned 117 insurers at the end of 2020. PE firms accounted for $487 billion in BACV [book-adjusted carrying value] of total cash and invested assets, compared to about $344 billion at year-end 2019.

The BACV of total cash and invested assets for PE-owned insurers was 6.5% of the U.S. insurance industry’s $7.5 trillion at year-end 2020.

The main benefit for PE firms is the capital that it can invest more freely without the oversight and complications that public companies endure. Even without pushing the investment envelope, the blocks of business come with a decent spread between revenue and cost, said McKinsey in a recent article, “Why Private Equity Sees Life and Annuities as an Enticing Form of Permanent Capital.”

Attracting Regulators

While the private equity stake in insurance companies is still relatively small, it has attracted the notice of regulators.

"Private equity has played a very big role in [merger and acquisition activity]," said Tim Zawacki, principal research analyst for S&P Global Market Intelligence. "All of this transaction volume has really triggered what I would consider a significant amount of media, legislation and regulatory inquiry of the role of private equity in insurance."

Life insurance sector M&A activity reached a 16-year high in 2021, Zawacki noted.

In Congress, the Pension Risk Transfer Accountability Act was introduced by Sen. Chris Murphy, D-Conn., in March. It directs the secretary of labor to review the department's guidance on fiduciary standards for retirement plans when selecting an annuity provider to distribute plan benefits. The bill "is framed in a private equity context despite broader participation in the PRT market," according to a slide in Zawacki's presentation.

Likewise, Senate Banking Committee Chairman Sen. Sherrod Brown, D-Ohio, requested a Federal Insurance Office report by May on several concerns related specifically to private equity backed insurers.

State Regulators Concerned

Meanwhile, the Life Actuarial Task Force, a National Association of Insurance Commissioners' entity, is proposing a new actuarial guideline for asset adequacy testing. If adopted, it would be effective for reserves reported at the end of 2022, said Jason Kehrberg, chairperson of the American Academy of Actuaries’ Asset Modeling and Reporting Task Force.

It would apply to life insurers with more than $500 million of general account actuarial reserves and at least 5% of supporting assets composed of projected high-net-yield assets, read a slide by Kehrberg.

In a recent paper for JDSupra, Greg Hoffnagle, a partner in Goodwin’s financial industry group and insurance practice, highlighted a National Association of Insurance Commissioners’ list of “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity Owned Insurers.”

“Regulators may not be obtaining clear pictures of risk due to holding companies structuring contractual agreements in a manner to avoid regulatory disclosures and requirements,” he wrote, and that “control considerations may exist with less than 10% ownership.”

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

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