Private equity firms have found a new way to access capital: by acquiring or partnering with life insurance companies. Historically, private equity (PE) firms raised money from institutional investors like insurers and pension funds, but now they are directly controlling insurers' premium income. This allows them to invest these premiums into their own private credit operations or use them to fund their portfolio companies, a model reminiscent of Warren Buffett's Berkshire Hathaway, though adapted for the current regulatory environment. Regulators note that while Berkshire used premiums to invest in stocks, modern PE firms use them for credit lines to their own enterprises.
This shift has transformed the once-conservative life insurance sector. Previously, insurers focused on high-grade bonds and blue-chip stocks. However, firms like Apollo, Ares Management Corp., Blackstone Inc., Brookfield Corp., and KKR & Co. have adopted bolder investment strategies. Apollo's early success with its insurer Athene, which had $83 billion in inflows last year (57% of Apollo's total raised capital), spurred many copycats. This access to a steady stream of capital is crucial for PE firms as traditional fundraising becomes more challenging.
The growing nexus between private equity and insurance raises significant concerns for regulators and policymakers. The Bank of England and the Bank for International Settlements (BIS) have highlighted that life insurers are increasing their exposure to riskier and less liquid asset classes to sustain profitability. They are also offloading risks through complex reinsurance agreements, often to offshore centers, to economize on capital. Private equity firms are identified as a primary driver of these trends, funnelling investments into private markets through their acquired or affiliated insurers. This approach, while potentially offering diversified investments, also risks propagating losses across an increasingly interconnected and complex insurance landscape.
For example, AM Best's 2021 study found that insurance companies owned by Wall Street investment firms earned 0.62 percentage points more on their portfolios than traditional insurers, indicating a higher-risk investment strategy. While this can lead to higher returns, it also introduces greater risk. Cases like PHL's estimated $2.2 billion hole illustrate potential vulnerabilities. Regulators are actively engaged, publishing extensive reports and scrutinizing these new business models, concerned about the potential for systemic risk if private market losses were to impact the broader financial system through these interconnected insurance entities.
