Last month the NAIC Capital Markets Bureau issued a Special Report finding that despite an increase in the number of private equity (“PE”) owned U.S. insurers, investment volume held by PE-owned insurers declined as of year-end 2021. The NAIC Special Report is timely coming off a Senate Banking Committee hearing earlier in the month in which some members expressed concern at the rapid expansion of PE firms into the insurance space, particularly through M&A activity. Some members have expressed concern that PE firms are less risk-averse than traditional insurance companies.
The Special Report states that the number of PE-owned U.S. insurers increased approximately 13% from year end 2020 to year end 2021. However, in aggregate PE-owned insurers make up only 3% of the total number of U.S. insurance legal entities. In terms of cash and invested assets, PE-owned insurer’s holdings are 6% of total industry cash and invested assets, double their 3% representation within the industry. As to holdings by investment class, as is the case with the rest of the industry, corporate bonds predominate and 95% of those bonds carry NAIC 1 and NAIC 2 designations, indicating highest credit quality. Where the PE-owned insurers materially differ, is their holding of asset-backed and other structured securities, where proportionally they hold almost triple the industry average. This relative propensity toward structured assets contributes to the volatility and liquidity risks raised by some policymakers.
While some PE-owned insurers may exhibit higher risk tolerances, as discussed in the Senate Banking Committee hearings above, they remain subject to the same oversight and regulation as other insurance companies. For years the NAIC has been raising questions as to how PE-owned insurers may differ from other insurers, closely monitoring their liquidity and solvency, and the NAIC will no doubt continue to do so.
For a summary of Senate Banking Committee inquiries as to PE-owned insurers, see Senate Banking Committee Chair Urges FIO And the NAIC To Monitor Private Equity and Affiliated Offshore Reinsurance in the Life Insurance Industry – Insurance & Reinsurance (insurereinsure.com) and NAIC Assessing Private Equity Involvement in Insurance Industry – Insurance & Reinsurance (insurereinsure.com).