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Private equity’s thrust in insurance to continue, slowly

US private equity firms and their funds have grown investments in the life insurance sector over the past several years, says Fitch Ratings.

However, that growth is expected to moderate as the high-value opportunities in the sector that manifested themselves the aftermath of the financial crisis have largely dried up. Heightened scrutiny by state insurance regulators will also be a headwind on private equity's further penetration in the life sector, at least over the short term.

Private equity's expansion into the life sector has helped certain European and Canadian insurers in their efforts to exit or pull back from the US life insurance and fixed-annuity market. Transactions completed over the past year include the acquisition of British insurer Aviva's US life and annuity business by Apollo's (Apollo, IDR 'A-', Stable Outlook) insurance-focused affiliate, Athene Holding Ltd. (Athene), and Guggenheim's acquisition of Canadian insurer Sun Life's US life and annuity business. Other private equity firms that have completed acquisitions in the life sector include Harbinger, Global Atlantic and Resolution Life.
Apollo's Athene has demonstrated an added rationale for private equity's investment in the life space — the potential to manage acquired businesses' investment holdings. Apollo earns a 40 bps fee on Athene's overall investment portfolio, totalling USD60.1 billion of AUM, and also earns fund-level private equity fees on the USD11.8 billion of sub-advised assets invested across Apollo's funds.
Regulatory risk has long been a curb on private equity's interest in the insurance sector, as individual state regulators must approve matters such as changes in ownership and special dividends.
State insurance regulators' concerns about private equity control typically centre on the private equity's potential prioritisation of short-term profits over the long-term health of the insurance company and its policyholders. Fitch sees this concern as especially important when a fund purchases the insurance company, given the limited fund life and need for an exit strategy.
Recent tightening in state regulators' powers is exemplified by the New
York Department of Financial Services proposing amendments to its regulations that would require insurance company acquirers to file additional information (and, potentially, establish keepwell trusts in the event capital is needed) in an attempt to address their concerns related to private equity ownership. The need to establish keepwell trusts would be considered by Fitch as a contingent obligation of the private equity fund and/or manager. 

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