Inside the private equity-insurance nexus

Asset managers have it easy. The parties, the access, the spreadsheets. And the money isn’t bad. However, to keep the show on the road, there is the minor detail of winning and retaining clients. But what if you just bought them?

While this isn’t exactly what private equity firms have done, neither is it completely not what they’ve done. As the Bank of England wrote in its latest Financial Stability Report:

Historically, PE business models have relied on PE firms or financial sponsors (general partners) raising funding at arm’s length from investors (limited partners) such as insurers, pension schemes, and family offices. Funds raised would then be used to lend to PE-sponsored corporates. The PE firm itself would retain limited risk on the underlying assets (eg high-yield bonds, leveraged loans), which they mostly originated to distribute to investors.

[However] . . . by acquiring life insurance liabilities, PE firms take control of how insurance premiums are invested and use these to, among other things, provide credit lines to PE-sponsored corporates.

This is a neat trick, mimicking the foundation stone on which Warren Buffett arguably built Berkshire Hathaway into a much-envied $1tn investment empire.

Admittedly, Berkshire used premiums paid to Geico — its massive property and casualty insurance subsidiary — as cheap leverage to buy stocks. Nowadays, no regulator would countenance an insurer punting so much of its premiums into stocks. Instead, private equity firms use premiums paid to their life and annuity insurers either to finance their portfolio companies’ leverage, or as a source of capital for their private credit businesses.

Doesn’t this sound a bit . . . risky? Judging by the quantity of long pdfs put into the public domain by regulators, policymakers and watchdogs over the past few years, they certainly seem on-edge engaged. As the Bank for International Settlements put it in its big annual report last year, with Alphaville’s emphasis below:

To sustain profitability, life insurers have increased exposures to riskier and less liquid asset classes. Some have also offloaded risks through complex reinsurance agreements, often to offshore centres, partly with an eye to economising on capital. Private equity firms have been a driving force behind these trends. They have funnelled investment into private markets by acquiring or partnering with life insurers or assuming insurance portfolios through affiliated reinsurers. While more diversified investments and greater risk-sharing can, in principle, support insurers’ resilience, losses in private markets could propagate risks across an increasingly interconnected and complex insurance landscape.

How real are these worries, and exactly how could an industry that is mostly dull by design get into trouble? Let’s rewind and paint a picture as to how we got here and where we are today.

Why insurance?

According to insurance-focused credit rating agency AM Best, the North American life and annuities sector controlled about $8.7tn of assets at the end of 2023. Over the past decade or so, private equity firms have gobbled up about a tenth of this market:

Why have some PE firms made such a big move into the market? For at least three reasons.

First, in the aftermath of the global financial crisis, private equity firms had access to abundant capital, and insurers were on sale.

Back in the day, investment banks — lacking a depositor base — owned and operated insurers as a cheap source of stable funding. For example, Goldman Sachs owned two insurers — Rothesay Life in the UK and the firm that became Global Atlantic in the US. Following the GFC regulation rewrite, it became incredibly expensive for US banks to own insurance companies, so they were put up for sale.

For what they were — a source of long-term sticky funding at maybe government bond yields plus 50 basis points — these were attractive to anyone with the wherewithal to buy them. And the asset side looked pretty good too: distressed sellers of decent credit securities were abundant, keeping spreads high.

Furthermore, in 2009 changes were made in capital treatment of private-label asset-backed securities to prevent asset fire sales and generally help out insurers. These had the effect of further juicing returns.

As a result, life insurers became fabulous vehicles for anyone who wanted to take the equity slice of a massively leveraged long credit trade. Private equity firms had appetite. And they made out like bandits.

Regulatory whatitrage?

Second, owning an insurance company presents a bunch of opportunities to engage in balance sheet optimisation and suck out supernormal profits.

Regulators try to protect policyholders from reckless gambling by their insurer. They do this by imposing a gradated set of capital charges on their supervisees’ holdings in an attempt to nudge insurance companies into boring assets.

Want to punt life insurance premiums on stocks? No problem — providing you have humongous amounts of capital set aside in case things head south. Want to invest premiums into triple A-rated bonds? This is much easier — you’ll need only the tiniest smidgen of capital and can, in effect, lever up the balance sheet.

But capital charges attached to different assets are not aligned across jurisdictions. Nor are they always totally joined up even within a single jurisdiction. This opens regulatory arbitrage opportunities for anyone seeking to game the system. And gaming regulatory wrinkles can pay off big time.

For a live example, take wholly owned collateralised loan obligations (CLOs) — where the whole structure is owned by one investor, rather than sliced up into many different tranches for many different investors as usual.

The National Association of Insurance Commissioners (NAIC), a standard-setting organisation that attempts to co-ordinate state-level insurance regulations in the US, has been trying for a few years to iron out kinks in the treatment of CLOs. Its beef is that the amount of capital an insurer must set aside really depends on whether the insurer has bothered to pay big structuring fees to a bunch of bankers:

As the NAIC writes:

Both have the same earnings (less structuring fees) and market value. Both have the same economic risk. [But the wholly owned CLO version] . . . requires about 1/3 the regulatory capital because it is a securitization and how they are rated.

This is clearly mad.

The alchemical regulatory arbitrage of wholly owned CLOs is a specifically American problem — it’s not something that can be easily done in Europe — and the NAIC has been trying for a while to get rid of it. We got in touch with NAIC to understand where it is on this journey and it directed us to this mini-site that charts the progress of its change programme. After starting to read through the pages of agendas, models and meeting minutes, we concluded that closing even obvious regulatory loopholes is hard.

The point is, if you manage to reduce the capital required on your insurance book, you can take that capital out of the business and pay yourself a massive bonus. Or you can use the newly magicked capital to write more business — boosting effective leverage and the scope for profitability. Or you can outcompete other insurers with cheaper products and grab market share. In other words, free money.

According to analysis by AM Best, 12 of the 20 US life and annuity insurers with the highest level of non-mortgage-backed security private structured securities — the category of assets that includes CLOs — were at the end of 2023 owned or sponsored by private equity firms. And about half of non-MBS private structured securities in the insurance industry were CLOs.

Hover your mouse over our splendid Marimekko chart to see which insurer is which, and to which PE firm each insurer is related:

We can’t be sure whether the outsized share of balance sheet held in private structured securities by PE-sponsored insurers is directly related to this arbitrage. But we do know that private equity people excel at extracting free money.

Bermuda, baby

In the US, reinsurance is big business. This is partly because — unlike in Europe — there is no legal mechanism to transfer an insurance liability. As a result, funded reinsurance is both extremely common and well-developed.

And along with the ramping up of private securitisation, life insurers have increasingly been using offshore reinsurers. Why? The US Treasury’s Financial Stability Oversight Council reckons:

Several motivating factors for offshore reinsurance have been reported, including less stringent regulatory requirements, tax policies, and accounting conventions than in the United States.

Sounds like more regulatory arbitrage?

MainFT has been reporting on the rise of Bermudian reinsurance for years. And in May it reported that US life insurers’ offshore reinsurance liabilities had collectively breached $1.1tn.

For a more detailed account of the rationale behind the Bermudian shift, we turn to the IMF, which has grown increasingly antsy about the intersection between private equity-linked insurers, their private credit holdings and their use of offshore reinsurance.

According to the fund, a big reason why Bermuda is favoured is its treatment of illiquid assets, which allows upfront profits to be booked as capital through the way they have an impact on the valuation of what insurance nerds call “technical provisions”.

Bermuda’s commercial reinsurance regime is deemed fully equivalent to Europe’s mark-to-market Solvency II regulatory regime, and has also been granted full reciprocal jurisdiction status by the NAIC in the US, which operates a book value system of regulatory accounting. And this, according to the IMF:

. . . has created incentives for life insurers to reinsure their portfolios to Bermuda-based insurers that back these portfolios with fewer liquid assets such as structured credit investments.

Translation: Bermudian reinsurance helps insurers boost their return on equity.

Of course, offshore reinsurance is available to any insurer — not just PE-linked ones. But according to the BIS, PE-linked insurers do seem to be the driving force behind the rush to offshore reinsurance.

They reckon PE-linked insurers accounted for about $500bn of the c$1.8tn of reinsurance business coming out of the US. And most of the PE-linked reinsurance was to their own offshore affiliates. Overall, the BIS calculates that:

PE-linked life insurers in the United States had ceded risk to affiliated insurers equivalent to almost half of their total assets (or nearly $400bn) by the end of 2023, compared to less than 10% of total assets for other US life insurers.

Control, control, control

The third reason for private equity’s growing intersection with life and annuity insurers is about controlling their assets and securing a diversified and committed source of cheap long-term funding.

Given that private equity groups are asset managers, the first thing control provides is the ability to appoint your own asset management arm to manage the assets. For a chunky fee.

For example, according to Securities and Exchange Commission filings, Global Atlantic Group paid KKR $536mn in 2024, while Athene Annuity and Life Company paid $1.3bn in management fees to Apollo. This is a handy captive, or at least semi-captive, stream of business.

Of course, controlling a pool of close to a trillion dollars of premiums doesn’t give PE firms licence to punt all the assets into leveraged buyout funds. This might have been a great trade for any asset owner, but it would have been spectacularly risky. And given that we’ve invented regulators to steer insurers away from making these kinds of wild bets without truckloads of capital, it would also have been illegal.

Of course, finding investors so far hasn’t been a major problem for PE managers, despite a crazy-high fee structure. In fact, they are collectively sitting on a trillion dollars of uncalled capital that they don’t seem to be able to find anything sensible to do with.

However, sourcing cheap and stable funding for the companies they buy is a different matter. As the IMF puts it:

PE companies are pivoting their strategy to private credit to address the fall in funding and banks’ growing reluctance to fund their LBOs.

You know who has a structural bid for these types of assets? That’s right, life and annuity insurers. Fixed income claims with credit ratings, that can be securitised on-balance sheet, and maybe reinsured — what’s not to like?

Private credit and affiliated assets

According to AM Best, private credit holdings among US life and annuity insurers have more than doubled over the past decade, topping $1.6tn in 2023. That’s close to 20 per cent of the insurance industry’s total assets.

It should be noted that the insurance definition of “private credit” is a little different to the one bandied about by private credit managers. In this case it includes any fixed income holding characterised as “private” in the Schedule D of NAIC annual statutory filings. As a result, tradeable corporate bonds and asset-backed securities — as well as the sort of direct lending to individual companies practised by private credit managers — will be captured in the figures.

AM Best’s detailed data only goes up to the end of 2023, but a new Moody’s report estimates it has since grown further, and reached about $2tn by the end of 2024.

Is this $2tn of industry-wide private credit exposure all just leverage being pumped into private equity buyout fund targets by the same PE firm’s affiliated insurers? No.

At an industry-wide level (including all the non-PE-sponsored insurers) the proportion of bonds held that were issued by affiliated entities was only 2.2 per cent at the end of 2023, according to AM Best.

But of the eight insurers with the highest share of affiliated bonds, six of them are PE-linked. We’ve turned their leaderboard into another Marimekko below:

As you can see above, the non-PE-linked insurer that blows all the others out of the water — with 70 per cent of its bond holdings issued by affiliates — is Berkshire Hathaway, the OG of private company ownership. But in size it is dwarfed by the likes of KKR’s Global Atlantic and Apollo’s Athene.

It’s important to note that bonds aren’t the only things on insurers’ balance sheets. There are also mortgages, prefs, common stock, real estate, derivatives, cash, etc. So the overall portion of total assets invested/lent to affiliate companies is likely to be lower than the chart above suggests.

We don’t have the time, patience, or frankly, the technical nous to run a system-wide analysis. But we did skim the latest 4,352 page quarterly statement from Apollo’s insurer, Athene, to get an anecdotal lay of the land.

Bonds account for $138bn of Athene’s $292bn total admitted assets at the end of March 2025. And just over a fifth of these bonds are issued by Athene affiliates. Overall, affiliate assets summed to $41bn — making up about 14 per cent of their $292bn of assets:

Apollo is a large, sophisticated and diversified private capital firm. As such, its elevated exposure to affiliates could simply be the result of Athene’s enviable access to the kind of diversified pool of higher-yielding private credit assets that every insurer would ideally want to hold.

But lending to affiliates has come into greater regulatory focus in recent years. And the 777 Partners debacle last year — covered with sparkling aplomb by MainFT — shows what happens when things go very wrong.

When thing go wrong

For a brief moment, 777 Partners was mostly famous for being a Miami-based investment group that tried and failed to buy Everton football club.

Then it became infamous for having the English High Court ordering its London branch to be liquidated, and ING suing it for alleged fraud — which it denies. ABC News has reported that the Department of Justice is also investigating whether it has violated money laundering laws.

The group drew much of its financing from insurance companies that were affiliated with it in varying degrees. Regulators weren’t crazy about this, and moved in April 2024 to force five insurers to reduce their exposure to 777, after they had exceeded regulatory limits.

And by December 2024, Utah regulators ordered three of these insurers — owned by New York’s A-Cap group, a major investor in 777 Partners — to stop accepting new money after losses on loans left them in a “hazardous financial condition” (in May of this year, the Utah Insurance Department and A-Cap entered mediation over the 777 issue).

Furthermore, the Bermuda Monetary Authority cancelled the registration of 777 Re Ltd — a Bermudian reinsurer to whom a number of insurers controlled by A-Cap group had “ceded” assets. As Ian Smith reported in MainFT last year, the Bermuda financial watchdog:

. . . put firms on notice over their exposure to connected parties, and their rationale for investing in them, warning over the risk of “undue influence” on investment decisions.

We’ve yet to see how this new regulatory focus on affiliate assets will pan out. If you’re interested, here’s a flowchart showing how the 777 insurance empire worked.

While the 777 saga was a fairly minor debacle in the grand scheme of things, the worry among some investors, regulators and policymakers is that it could conceivably be replicated on a grander scale at larger insurers.

In which case, the fallout could be harder to contain. As the Bank of England observed in its November 2024 Financial Stability Report:

This business model, while promising benefits, has the potential to increase the fragility of parts of the global insurance sector and to pose systemic risks if vulnerabilities are not addressed.

Who cares?

Does it really matter to anyone that private equity firms are gobbling up US life insurers, engaging in large-scale securitisation of their balance sheets, reinsuring liabilities in Bermuda, directing them to use affiliates to manage the assets, lending a fair chunk of the assets to portfolio companies, and making a ton of money in the process?

After all, it’s not only private equity-sponsored firms that engage in regulatory arbitrage balance sheet optimisation. It’s not unusual for any insurer to choose an affiliate to manage its portfolio. In fact, several of the world’s biggest asset managers are in practice subsidiaries of insurance companies — such as Legal & General’s LGIM, Prudential’s PGIM and Allianz’s Pimco. Lots of US life insurers have been using Bermuda to do funded reinsurance. And it’s not unknown for non-PE firms to pile into private credit, or even to lend to affiliated companies.

But in all these areas, private equity-backed insurers look like outliers.

In a study published by The Review of Financial Studies last year, Divya Kirti and Natasha Sarin found that insurers taken over by private equity firms in the period 2009-14 saw their investment portfolios quickly move to riskier assets such as private asset-backed securities.

The authors showed that PE-owned insurers boosted return on equity not through any superior skill in managing insurers’ portfolios or operations, but through capital and tax arbitrage. In fact, they found that annual expected losses scaled rise by an average of 50 percentage points after PE owners take control.

Put another way, regulators require insurers to hold capital so that they can absorb a given quantity of expected losses, but private equity-controlled insurers are particularly adept at doing so . . . extremely efficiently. But this has some potentially problematic consequences, the paper argued:

PE-backed insurers’ arbitrage involves holding less capital to back risky portfolio investments. As a result, expected losses for PE-backed firms far outpace losses for non-PE counterparts. This creates the possibility that consumers will see harm in the event of a downturn.

The Kirti-Sarin study concluded in 2014 — which in the fast-moving world of PE manager business model evolution is almost Jurassic times — but, still, ooof!

And while private credit may well be a very good fit for insurance, the absence of secondary market prices puts the onus on fund managers to fess up any credit provisions. It’s hard for regulators and outsiders to really get a sense as to how the credit metrics of insurers’ private credit books are developing.

Or as the US Treasury’s FSOC notes, when discussing the issue in its annual report:

Fund managers may be incentivized to maintain high valuations and delay the recognition of losses,

There’s no suggestion that private equity firms have broken any rules. And everything may well turn out just fine. Indeed, there’s a decent argument that the dynamism brought by private equity firms to insurers is exactly what the sector needs.

Sure, PE-linked insurers “optimise” their balance sheets more than their public equivalents. But is that really such a bad thing? And while PE-linked insurers might allocate more to private credit, maybe this is better than a concentrated portfolio of lower-yielding investment-grade corporate bonds, if the result shows up in better consumer-facing products?

Moreover, it’s not as though public insurers are all saints. There may well be plenty of things riskier than private credit knocking around public insurers’ balance sheets. AIG famously got into a spot of bother back in 2008, and it could hardly blame private equity for that.

All that said, we can see why regulators and worrywart investors are taking a closer look at the whole nexus. And only time will tell as to how the mix of private credit, CLOs and offshore reinsurance delivers for PE-linked insurers the next time there is a downturn in the credit cycle, or some exogenous event that causes a jump in policy cancellations — and in the process testing the assumption that illiquidity is fine and dandy.

Private equity for retail?

Well done for making it this far. If you bear with us, there’s one last point that’s worth picking up before we finish.

Last month Orlando Bravo, the billionaire co-founder of buyout firm Thoma Bravo, raised eyebrows with a warning that wealthy individuals could easily end up as the private equity industry’s bag holders. This concern has been around for a while, but it’s one typically voiced by public market plebs rather than private market royalty.

And the warning came around the same time that the Trump administration was reported to be debating an executive order that would open American 401k defined contribution retirement plans to private capital — potentially providing vast amounts of exit liquidity to private equity funds struggling to find buyers for portfolio companies at valuations that work for them.

Whether or not retail investors are sufficiently well equipped to navigate private equity is a topic for another time.

But it’s not often remarked that ordinary Americans have already — and for years — been buying vast amounts of complex exposure to private equity risk. They’ve just been doing so (without realising it) through their boring old life cover and fixed annuities.