Private Equity Ownership, Risk-Taking, and Performance in the Life and Annuities Industry

Abstract:

Since the Great Recession, there has been a wave of private-equity investments in life and annuities insurance firms. State insurance regulators have raised concerns that private-equity investors face incentives to boost a firm’s near-term returns at the expense of greater risk to long-term performance. In this paper, we argue that private-equity investors increase the risk profiles and returns of life and annuities insurance firms. We assess changes in a firm’s investment behavior and capital management after a private equity investment takes place. We conclude that private-equity-backed insurers substitute away from corporate bonds in favor of investments in asset-backed securities. This substitution coincides with a change in the NAIC regulatory regime that decreased the capital charge assessed on these holdings, allowing firms to take on extra priced-asset risk without incurring corresponding regulatory capital charges.

Last updated on 04/02/2018