2021 was an active year for mergers and acquisitions with large block reinsurance transactions leading to a 41% increase in admitted assets owned by private equity firms.
According to AM Best report, states that as life/annuity insurers’ earnings have been pressured, with capital that has been strained due to reserve adjustments, insurers’ willingness to divest businesses has been bolstered; private equity firms have been eager to step in.
With the year-over-year increase in admitted assets to $850bn, private equity insurers now have a 10% share of the US life/annuity’s total assets, more than double the share from five years ago.
More-experienced private equity firms have gotten comfortable managing insurance assets while adhering to constraints imposed on their portfolios, such as regulatory compliance and rating agency capital charges on asset and liability risks, ALM matching requirements and liquidity concerns.
As these firms take advantage of the more-permanent capital and premium flows afforded them through ownership of an insurer, there is less of a need to look for a quick exit from their investment.
The private equity firms have entered the insurance market in one of two ways:
- by controlling an insurer through an equity investment and buying or reinsuring blocks of business from other insurers, while influencing the insurer’s investment management strategies to earn higher yields;
- by working with insurers as a partnership or outsourced chief-investment officer, whereby the private equity firm manages a portion of the insurer’s assets for a fee.
The most-notable closing of 2021 was KKR’s acquisition of Global Atlantic, an insurer with over $120bn of admitted assets, although Global Atlantic has been through the private equity life cycle.
This deal, along with Venerable’s acquisition of Corporate Solutions Life Reinsurance Company from Equitable Holdings, fuelled the growth in admitted assets owned by private equity firms in 2021.
Also included in the 2021 data, although it closed in April 2022, is the acquisition of Prudential Annuities Life Assurance Corporation (PALAC) by Fortitude Re.
PALAC has over $48bn of admitted assets and $31bn of in-force variable annuity accounts, consisting primarily of non-New York, traditional variable annuities with guaranteed living benefits that were issued prior to 2011.
Even with their more diversified bond portfolios, less than a third of private equity insurers have exposures to below-investment-grade bonds greater than the industry average of 5.9%.
The investing strategies of private equity insurers have helped them consistently generate a higher net yield since 2017, and most continued to outperform the individual annuity writers’ composite in 2021.
The competitive pricing private equity insurers can offer puts more pressure on traditional insurers that lack the same scale with more-conservative crediting rates.
Scale in annuities is important to drive costs down. With the acquisition of Global Atlantic in 2021, private equity insurers now account for nearly 20% of individual annuity reserves and more than 33% of indexed annuity reserves.