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Ultra-Low Interest Rates Are Driving Insurers Into the Arms of Private Equity

Cerulli Associates expects to see more private equity mergers and acquisitions in the insurance industry as a result of the pandemic.

Insurance companies are looking to private equity for help amid a return to near-zero percent interest rates, according to Cerulli Associates.

“Many insurers are looking to partner with PE firms,” the research firm said in a statement Thursday. According to Cerulli, insurance companies are being “battered” by historically-low interest rates and are in need of higher-yielding investments like private equity to match their underwritten liabilities.

“The low interest environment leaves very little room for poor underwriting or asset management performance — it’s a rising threat to insurers’ business models,” associate director Robert Nelson said in the statement. 

U.S. interest rates were cut to historic lows in mid-March as the spread of coronavirus began to threaten the economy. The Federal Reserve said Wednesday that bank officials expect to leave the Fed’s interest rate near zero through at least 2023.

Insurers surveyed by Cerulli this year indicated that low interest rates were by far the greatest threat to their investment portfolios, with 88 percent saying that they were “very concerned” about their ability to generate returns.

“Insurers have been struggling under the weight of ultra-low interest rates for over a decade, experiencing only a modest rebound in rates even as the economy rebounded from the 2008-2009 financial crisis,” Cerulli said in a report on the findings. “The Covid-19 pandemic and accompanying economic trauma have cemented the idea that insurers’ book-yield challenges are going to get tougher before they get easier.”

To compensate for lower fixed-income returns, surveyed insurers said they have continued to increase their exposures to alternative investments, including fixed-income alternatives and other assets like real estate, infrastructure, and private equity. As a result, private equity-driven mergers and acquisitions “have become an increasingly attractive option,” according to Cerulli.

“A takeover of general account assets by a PE firm gives the insurer, in effect, an affiliated PE manager and the fee advantages typically seen in co-investing scenarios — a much more cost-effective and efficient way to attain the desired alternatives exposure,” Nelson said.

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Private equity firms, meanwhile, may be motivated by the permanent capital that an insurance acquisition could provide, according to Cerulli.

“Permanent capital is more valuable to PE firms because it’s stickier,” Nelson said. “Stable and positioned for the long term, permanent capital is perfectly fitted for the longer time horizon investments for which private investors are known.”

While merger and acquisition activity has slowed during the pandemic, Cerulli said that major private equity firms “are still focused on the industry and wiling to pull the trigger for a target that fits within their business strategy.” Smaller firms also appear to be targeting insurance acquisitions, Cerulli said.

“Businesses are adapting and creating workaround to pandemic-related hurdles,” Nelson said. “It won’t be long before this transformative trend resumes across the industry.”

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