Ties between private equity firms and insurance companies will likely tighten further, even amid stirrings of regulatory concerns.

Private capital is playing an increasing role in the insurance market as private equity firms seek access to insurers' huge asset pools, and insurers tap into private equity asset management skills to help boost returns. The trend has seen the share of U.S. life-insurer assets held by private-capital-owned platforms surge to almost 9% from less than 1% a decade ago, according to McKinsey & Co.

"I don't think you can go backwards at this point," said Matt Hutton, a partner in Deloitte & Touche's mergers and acquisitions transaction services practice. Private equity firms want access to insurers' assets "in perpetuity," he said.

Mutual attraction

The growing closeness between the two industries has drawn scrutiny from lawmakers and regulators, partly because private equity firms have been able to buy into insurance companies while avoiding traditional industry checks. Still, this may do little to cool the trend due to private equity firms' hunger for assets, previous success in doing deals and their ability to help insurers make better returns either through acquisitions or investment partnerships.

"There are a lot of synergies," said Isabelle Santenac, global insurance leader for EY. Deals between the two sides are "going to continue in the coming years."

The top 10 private equity insurance deals last year totaled about $6 billion, led by the $2.1 billion The Carlyle Group Inc.-backed acquisition of reinsurer Fortitude Group Holdings Parent LP. The industrywide tally slipped from 2021 — a record year for private equity deals in general — partly due to rising interest rates and market volatility.

Carlyle set up a special vehicle with other investors for the Fortitude transaction, in which it will hold a 10% stake. Blackstone Inc. used a similar structure to acquire a 6% stake in Resolution Life Group Holdings LP.

When approached for comment, a Blackstone spokesperson pointed to remarks made by COO Jon Gray during a third-quarter 2022 earnings call highlighting the benefits of purchasing Resolution Life. Gray described the purchase as an example of Blackstone's strategy to serve as an investment manager for insurance clients "without becoming an insurance company ourselves or taking on liabilities."

Carlyle did not respond to a request for comment.

Regulatory gap

The use of minority stake holdings allows private equity firms to avoid not only the risks of being insurance companies but also the oversight that would bring. Insurance has historically been a heavily regulated industry.

This regulatory gap and the growth of private equity involvement in insurance have prompted calls for action from lawmakers. In August, Sen. Sherrod Brown, D-Ohio, the chairman of the senate banking committee, pushed federal and state regulators to ensure that there are adequate safeguards against excess risk-taking by insurers.

The Treasury Federal Insurance Office should examine "increased risk-taking behavior across the life insurance industry, which could contribute to increased systemic risk across the financial system," Brown said, according to a press release. He wrote letters to the federal agency and the state-level National Association of Insurance Commissioners, or NAIC.

The NAIC later outlined 13 concerns about private equity-owned insurers, including whether private equity's traditional short-term focus clashed with the long-term liabilities of life insurance products. The NAIC also highlighted how deal structures negated the need for disclosures, leaving regulators in the dark about risks.

An updated list of concerns was presented at the NAIC's fall meeting in December 2022, according to law firm Mayer Brown, but the relevant working group has not taken any action so far.

The road ahead

Private equity firms will likely continue looking at insurers as private equity firms seem committed to the strategy and have a track record of success, said Tim Zawacki, principal research analyst covering the U.S. insurance industry for S&P Global Market Intelligence. Private equity firms have also already pursued a variety of insurance strategies, including the acquisition of insurance distributors as portfolio companies and the addition of life and annuity carrier balance sheets as a source of permanent capital, he said.

Life insurers will be open to deals as they seek to transform their balance sheets, Zawacki added. The industry has also become less wary of private investing, according to Sanjay Yodh, head of insurance solutions and distribution for Monroe Capital Asset Management LLC.

"More and more insurance companies on a day-to-day basis are very familiar with the attributes, characteristics and then the risks of investing in private markets," Yodh said in an interview. "As it turns out, they're very manageable."