With PE-backed firms now controlling 10% of insurance assets, creative financial engineering is boosting profits—but hidden risks could haunt the industry’s future
Traditionally viewed as a bastion of stability, the life insurance sector has undergone significant transformation due to shifts in its financial structure and asset management practices. Once characterized by predictability, the industry is now experiencing a mix of innovation and uncertainty, largely driven by PE initiatives.
The aftermath of the 2008 global financial crisis marked a turning point, as central banks implemented unprecedented interest rate policies. The recent cycle of rate adjustments, aimed at countering inflation amid slowing growth, has also impacted the life insurance sector. As PE firms, including the Blackstone Group, KKR, and Apollo, recognized enhanced growth potential, their interest in the life insurance business surged. By the end of December 2021, assets managed by PE-backed firms accounted for 10% of the insurance sector—up from just 2% a decade prior, according to the International Monetary Fund (IMF). This shift reflects a broader trend where quantitative easing has driven investors to seek better returns in private equity.
The rationale behind infusing PE capital into life insurance is compelling. Insurance companies, struggling with persistently low returns, require capital infusions, while buyout firms are eager for new avenues to generate long-term value. However, PE firms bring more than just capital; they introduce advanced financial models that have fundamentally altered the life insurance landscape.
A notable transformation is the evolution of reinsurance strategies. PE-backed insurers have outperformed traditional firms in leveraging these strategies to strengthen their balance sheets and enhance return on equity, often through investments in higher-risk assets. While policyholders benefit from consistent annuity payments, these developments have raised concerns among regulators.
The Bank for International Settlements (BIS) and the IMF have cautioned about potential long-term implications arising from these changes. Many private capital assets on life insurance balance sheets are illiquid and lack transparency, creating potential conflicts of interest—exemplified by KKR’s acquisition of Global Atlantic, where KKR aimed to boost fee revenues by reallocating Global Atlantic’s investments into KKR-managed funds.
Moreover, reinsurance contracts linked to affiliated companies exacerbate these concerns. As of December 2023, PE-linked life insurers in the U.S. had ceded nearly 50% of their total assets to reinsurance arrangements, with a significant portion placed with affiliate reinsurers in offshore financial centers. This intra-firm reinsurance may obscure the actual risks faced by these insurers.
Investor apprehension has already surfaced, particularly following the collapse of Silicon Valley Bank, which prompted fluctuations in life insurance stocks as concerns about the implications of low-interest environments and interconnected financial systems grew. Despite this, many of the risks inherent in the life insurance sector remain concealed.
As the rate cycle shifts and quantitative easing diminishes, new challenges for life insurance companies may emerge. While innovative financial engineering has revitalized the sector and potentially enhanced short-term profitability, the long-term consequences of these developments are uncertain. The BIS and IMF warn that the risks associated with these changes could ultimately materialize for insurers, and a return to “normal” does not guarantee the disappearance of financial anomalies. Consequently, while life insurance has evolved from a relatively mundane industry, it now embodies a heightened degree of risk.
