Private Equity Is Taking a Long, Hard Look at Insurance. So Far, It Likes What It Sees.

Life and annuity companies are now providing private equity firms with “a once-in-a-generation opportunity,” according to McKinsey.

Illustration by II

Illustration by II

Private equity and other alternatives firms have long salivated over insurance company assets as a source of permanent capital. Now that trend has been kicked into high gear.

Just look at deal making. In December, Allianz Life entered a reinsurance agreement with Sixth Street’s portfolio company Talcott and partner Resolution Life. Late last month, Sixth Street announced a $25 billion reinsurance transaction between an affiliate of Talcott Resolution and Principal Financial Group. Earlier in 2021, private equity giants like Blackstone, KKR, and Apollo all announced mergers or acquisition plans to further build up their insurance portfolios. In total, private investors in the U.S. acquired or reinsured more than $200 billion in 2021, according to a McKinsey report.

“Assuming the pending deals close successfully, private investors will own 12 percent of the life and annuity assets in the U.S., totaling $620 billion, and represent more than a third of U.S. net written premiums of indexed annuities,” the report said.

According to McKinsey, one major factor that has attracted private equity firms to the insurance space is the spread between the cost of liabilities and the potential investment returns. Insurance companies are “well stocked with assets,” which usually exceed the future payouts by a large amount. Until the companies approve insurance claims, they need to find return-generating investment vehicles in which to park the assets, and that falls into private equity’s area of expertise. Of course, insurance firms are highly regulated and only a small portion of these firms’ assets, which back policies, can be moved into higher risk investments.

The report noted that there are three advantages to PE firms controlling life and annuity firms through equity investments. First, asset managers can generate internal rates of return as high as 10 to 14 percent by rotating through different asset classes. Insurers are thus exposed to assets with higher risks, such as asset-backed securities, and higher potential returns. Second, insurance investments are a natural way for GPs to expand their footprint in credit investments, which “is a strategic growth area for many firms at a time when PE markets are becoming more competitive.” Lastly, the massive insurance market could help PE firms scale up quickly, according to the report.

While a marriage with insurance companies is more common among established PE firms, new entrants can still develop their own edge in the market, the report said. What can differentiate them from the giant players lies in their talent programs, target geographies, and operational strategies.


The report also listed three main challenges for PE firms that are looking to expand their footprint in insurance. The first one is illiquidity and credit risk. “Rotating the portfolio into higher-risk credit assets has advantages, but [it] also creates risk that is important to manage, particularly as the portfolio has typically been invested in more liquid, stable assets,” the report said. The second is that life insurance is a highly regulated industry, and PE firms need to find their own methods of engaging with state insurance commissions.