US regulators are raising concerns about the growing trend of private equity firms, such as Apollo and KKR, acquiring and partnering with life insurers. This strategy allows PE firms to use their affiliated insurance companies to invest in their own private credit funds and structured securities, creating a "circular risk" that could destabilize the insurance sector. Regulators worry that this practice encourages insurers to hold less capital to back risky portfolio investments, leading to higher expected losses for PE-backed firms compared to their non-PE counterparts. According to AM Best, 12 of the top 20 US life and annuity insurers with the highest level of non-mortgage-backed security private structured securities were owned or sponsored by private equity firms at the end of 2023.
PE-backed insurers are employing capital and tax arbitrage to boost returns, rather than superior portfolio management. For instance, a study found that expected annual losses scaled by an average of 50 percentage points after PE owners took control of insurers. These firms are moving investment portfolios into riskier, less liquid assets like private asset-backed securities, including wholly owned collateralized loan obligations (CLOs), which require significantly less regulatory capital due to how they are rated. This regulatory arbitrage, particularly with wholly owned CLOs, is a specific issue in the US that the NAIC has been attempting to address.
Furthermore, PE-linked life insurers in the US ceded nearly $400 billion, or almost half of their total assets, to affiliated insurers by the end of 2023, compared to less than 10% for other US life insurers. Much of this reinsurance goes to offshore affiliates, particularly in Bermuda, which offers favorable treatment for illiquid assets and allows for booking upfront profits. This setup provides PE firms with a captive source of long-term funding and significant management fees; for example, Global Atlantic Group paid KKR $536 million in 2024, and Athene paid Apollo $1.3 billion. Overall, private credit holdings among US life and annuity insurers have more than doubled in the last decade, reaching over $1.6 trillion in 2023, representing nearly 20% of the industry's total assets.
