PE investment in insurance industry needs ‘some guardrails,’ expert says

By John Hilton

It can be hard to keep track of the whirlwind of private equity investment in life insurance and annuity companies. For some, it is downright concerning.

State insurance commissioners, consumer advocates and even a Senate committee are all probing the complex deal-making marrying insurers to Wall Street. The concern is simple: are private equity firms trustworthy stewards of the trillions in assets Americans are counting on in retirement?

Eileen Applebaum has her doubts. Co-director of the Center for Economic and Policy Research, Applebaum is an expert in private equity.

Applebaum laid out three rules she wants to see applied to private equity deals:

• Cap the fees. “When they take your retirement savings and put them into riskier assets, there’s high fees for doing that and there needs to be a cap on those high fees,” she said.
• Ban self-dealing. There are no rules to prevent a private equity firm from taking life insurance and annuity assets and investing them in their own funds, Applebaum noted.
• Raise reserving requirements. Raising the amount firms need to hold in reserve would somewhat offset the riskier investments, Applebaum reasoned.

“There have to be some guardrails,” she said. “Those three things I think would go a long way to protecting the policyholders better.”

Insurers' interest in private equity is only expected to grow as inflationary pressures grow, said Michael Siegel, Global Head of Insurance Asset Management for Goldman Sachs Asset Management, in a recent interview.

“One is a continued movement from public assets to private assets. That would be public equity to private equity, that would be public fixed income to private fixed income in order to pick up the illiquidity premium,” Siegel said.

In it ‘for the long-term’

Meanwhile, the National Association of Insurance Commissioners brushed off an inquiry from Sen. Sherrod Brown, D-Ohio. Chairman of the Senate Committee on Banking, Housing and Urban Affairs, Brown sent a March letter asking the NAIC for information on the impact of private equity on insurance.

In a response sent May 31, the final day of Brown’s deadline, NAIC leadership downplayed any concerns. Over nearly a decade, state insurance regulators put many safeguards in place to ensure the long-term protection of assets under private equity control, the letter said.

“Over time, as transactions were reviewed and regulators had discussions with the board and management of these firms, some of our initial concerns were reduced as PE firms either retained or brought on long-tenured insurance finance professionals and demonstrated they were in this industry for the long-term,” reads the letter signed by Idaho Insurance Commissioner Dean Cameron, 2022 NAIC president, and other officers.

Birny Birnbaum, executive director of the Center for Economic Justice, is an NAIC consumer advocate. State insurance regulators are often territorial when it comes to federal encroachment into insurance matters. Still, Birnbaum is baffled by the letter.

"Given the systemic nature of the life insurance industry's trillions of dollars of assets and pledges for retirement security, it's odd that the NAIC would not welcome a collaborative approach with federal regulators to ensure comprehensive oversight of and access to PE activities," he said via email. "We saw how the go-it-alone approach failed with private mortgage insurance and bond insurance in 2008 to 2010."

A significant concern for critics is private equity investment in collateralized loan obligations (CLOs). A CLO is a single security backed by a pool of debt. CLOs are often corporate loans with low credit ratings or loans taken out by private equity firms to conduct leveraged buyouts.

Many critics hearken back to the 2008-09 housing collapse and economic downturn caused by Wall Street’s flirtation with similarly risky mortgage-backed securities. But NAIC leaders say they are changing their guidelines in ongoing meetings of its various committees and subgroups.

“The NAIC is actively pursuing changes to the state insurance regulators’ solvency framework intended to focus on these increased risks,” the letter explained. “This includes but is not limited to potential changes in the capital requirements for certain asset-backed securities such as (CLOs), changes in the asset adequacy analysis testing requirements, and a review of several risks that are more common within private equity firms but that may also be held by other insurers.”

Sources with the Senate Banking committee say they are awaiting further information before any further action, if any, is taken.

In an interview with InsuranceNewsNet, Applebaum isn’t confident state insurance regulators are best equipped to set rules for powerful private equity firms.

“The idea that state regulators who have not had to deal with private equity before will suddenly develop the expertise to do it seems very unlikely,” she said.

Major deals

The private equity hunt for insurance assets involves the biggest names on Wall Street. In a deal sewed up this year, Principal Financial sold its fixed annuity and universal life business to the investor Sixth Street in a $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.

Insurance companies’ private equity investments grew to $117.4 billion in 2021, up from $93.3 billion the previous year in the biggest year-over-year increase in recent years, according to a recent AM Best report.

Low interest rates backed insurers into a corner, where the only viable options were to raise premiums or seek investment partners. Private equity firms have the expertise to grow profits even in the toughest economic conditions.

Applebaum authored a January column summing up the very recent history of private equity interest in retirement assets and the growing reasons for concern.

“They have increased their assets under management tremendously because the insurance companies, or any company that sells annuities, have a huge pile of assets they’ve accumulated over the years,” she explained. “Everything we know about them is that they engage in financial engineering and their goals is to enrich the private equity firm partners and the various partners in their equity funds.”

Ideally, Sen. Brown or another legislator would put a bill on the floor of Congress to “put the fear of God into private equity firms and maybe they regulate themselves better,” Applebaum added. “You can’t rally around anything if there’s nothing out there.”

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.

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.