## Introduction

## Source details

**Canonical URL:** [Introduction](https://www.imf.org/-/media/files/publications/gfs-notes/2023/english/gfsnea2023001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/gfs-notes/2023/english/gfsnea2023001.pdf.md)
- [Structured JSON version](/-/media/files/publications/gfs-notes/2023/english/gfsnea2023001.pdf.json)

---

### Key findings on industry shifts and motivations
- Prolonged low interest rates over the past two decades:
  - Put pressure on the viability of life insurers offering guaranteed rates of return on their products.
  - Made guaranteed-return products less attractive to policyholders as investment returns declined.
- Economic valuation and economic capital requirements exposed the high capital intensity of traditional, guaranteed return life insurance products for which the insurer bears investment, mortality, and longevity risks.
- Many large insurance groups pivoted away from capital-intensive business lines toward capital-light business such as unit-linked products, leaving much of the investment risk with policyholders.
- Private equity (PE) companies acquired and gained exposure to long-term, capital-intensive liabilities on life insurers’ balance sheets that originators sought to exit—deploying new private capital to support traditional fixed annuity products.
- Observed changes in PE-owned life insurers include:
  - Increased illiquid investments in complex structured products used to fund leverage in other sectors of the economy.
  - Active use of reinsurance to reduce longevity risks and long-term liabilities, releasing more capital to invest in riskier assets.
- This Global Financial Stability Note studies PE investments into the life insurance industry, reviewing:
  - Growth in PE investments.
  - Diverse acquisition incentives and strategies.
  - Consequent changes to asset allocation and investment strategies of acquired life businesses.
  - Potential prudential and policy implications.

### I. The Growth of Private Equity and Private Debt

- PE assets under management (AUM) and fundraising:
  - AUM of PE companies almost tripled during 2016–22, reaching close to $12 trillion as of mid-year 2022.
  - Annual capital raised for PE strategies and the number of funds increased by more than 60 percent between 2008 and 2022.
  - Funds raised had significant volatility: trough in 2010 with only $205 billion and peak in 2021 with $830 billion.
  - PE companies rely on frequent fundraising, with typical tenor of funds raised ranging from 5 to 10 years.
- Industry concentration and geography:
  - As of end-2022, the top 10 PE companies accounted for 31 percent of global AUM.
  - The top three companies (Blackstone, Apollo, and KKR) represented 19 percent of worldwide AUM.
  - The PE industry is US-centric:
    - US companies account for about half of all PE companies and more than 70 percent of global AUM.
    - Footnote data: as of the end of 2022, about 1,094 PE companies exist globally, with AUM more than $1 million. Of these, 534 are based in the United States.
- Investor demand and allocations:
  - Limited partners (public and private pension funds, insurers, endowments, sovereign wealth funds) increased portfolio allocations to PE over the past five years.
  - Sovereign wealth funds increased their portfolio allocation to PE from 10 percent to 17 percent during 2017–22.
  - PE index returns outperformed other asset classes after 2015.
- US public pension funds (PPFs):
  - Average fund size rose from $14 billion in 2001 to almost $32 billion in 2022.
  - Percentage of PPFs with exposure to PE grew from 50 to 80 percent during 2001–2015, before stabilizing.
  - Allocation level increased from about 6 percent of total assets in 2001 to 16 percent in 2022, accelerating over the past two years.
  - In 2021 and 2022, the PE allocation share was well above the average allocation target of 10.5 and 11 percent, respectively.
  - PPF PE portfolio returns have been more volatile than other PPF asset classes; in 2021 PPF PE portfolio annual returns peaked at about 45 percent before declining to 20 percent.
  - Note on above-target allocations in 2021 and 2022:
    - In 2021, due to low interest rates and the search for yield leading to the highest level of capital raised ($830 billion).
    - In 2022, due to a moderate decline in capital raised while all public market assets declined significantly in value (denominator effect).
- 2022 slowdown:
  - PE experienced a slowdown in 2022 as investors exceeded allocation targets and fixed income became more attractive with higher interest rates.
  - Capital raised by PE decreased by 12 percent between 2021 and 2022.
  - Number of funds fell by more than one-third to 1,520 funds.
- Shift toward private credit:
  - Decline in LBO funding spurred PE companies to increase private credit activities.
  - Banks reduced financing of LBOs significantly in 2022, and private credit funds filled the void via direct funding of LBOs or purchase of bank-originated LBO debt.
  - Example: KKR’s acquisition of 60 percent of Global Atlantic (a US life insurer) in 2020 cost KKR approximately $3 billion.
    - KKR estimated this transaction increased its fee-paying AUM by 48 percent and expected to increase fee income by $200 million per year or more.

### II. PE and Insurers

- Historical context and strategies:
  - PE involvement with life insurers dates to the 1980s, with increased activity since the global financial crisis.
  - Range of PE strategies in relation to life insurers:
    - PE companies own a small strategic stake in a life insurer (often less than 10 percent) and provide specialist investment management services (structured credit, private credit, private real estate, private equity). These are sometimes described as strategic alliances.
    - Life insurers purchased and owned by LBO schemes arranged by PE funds (traditional PE model).
    - Full or majority ownership of life insurers held by PE companies on their balance sheets for strategic importance to other PE activities.
    - Life insurers heavily using offshore life reinsurers owned by PE companies to reinsure life insurance portfolios and strategically restructure businesses.
  - Traditional LBO mechanics and recent funding shifts:
    - PE fund (general partner) raises capital from limited partners (public and private pension funds, sovereign wealth funds, endowments, insurance companies).
    - Once target investment is raised, the closed-end fund uses leveraged financing (traditionally provided by banks) to buy companies—including life insurers.
    - Leveraged buyouts typically expect exits within the closed fund horizon (typically within 10 years).
    - From late 2022 onward, banks significantly reduced funding of LBOs, lowering LBO deal volumes and increasing private credit involvement.
- Incentives and portfolio effects:
  - PE involvement gives control and stable supply of a substantial long-term asset base to manage and derive fee income.
  - Investment allocation of PE-influenced life insurers is skewed toward illiquid investments compared with other life insurers.
- Use of offshore reinsurers and consolidation platforms:
  - PE firms use ownership of life insurers and offshore reinsurers as platforms to acquire other life insurers or assets through transfers or reinsurance transactions.
  - Bringing together smaller books of business into a larger business to derive synergies and efficiencies (including investment in technology) is a common strategy.
- Definition:
  - The term “PE-influenced life insurers” generically refers to all four strategies described above.

### Asset allocation and liquidity implications
- PE-influenced life insurers have fewer liquid investments than the aggregate of all insurers; U.S. data show greater allocations to:
  - structured credit such as collateralized loan obligations,
  - mortgage loans,
  - private commercial and residential mortgage-backed securities.
- Greater investment in structured and private credit worsens liquidity mismatches between assets and liabilities and could complicate portfolio liquidation if facing margin calls, repo contracts, or policy surrenders.
- Embedded leverage in structured-credit investments (e.g., collateralized loan obligations) can aggravate severity.
- Private assets introduce valuation uncertainty and liquidity risk:
  - Private debt counterparties may be unable to access bank funding or public debt; average credit risk may be higher than public assets.
  - Published valuations of private assets do not respond to market conditions as readily as traded assets, increasing risk of sharper, faster price adjustments when losses are crystallized.
  - Example: secondary market for PE assets priced at 92 percent of net asset value in 2021 and fell to 81 percent of net asset value in 2022 (Jeffries LLC 2023).
- Typical life insurer capital is about 10 percent of assets; this can be eroded much faster in a scenario of rapid increases in corporate defaults.
- Herding behavior: insurers on aggregate have doubled their illiquid investments over the past decade at a global level (share of Level III assets for a sample of 50 large insurers).
- Use of leverage to fund illiquid assets has increased, evidenced by greater use of nontraditional liabilities such as funding-agreement-backed securities.

### Evidence on changes after PE takeovers
- When PE companies gain control of life insurers, they quickly change investment portfolios and enter affiliated reinsurance transactions.
- Kirti and Sarin (2020) findings:
  - PE-influenced insurers decrease their share of corporate bonds by more than 7 percentage points and increase private-label ABS holdings by more than 6 percentage points within a year after takeover.
  - PE-influenced insurers more aggressively exploited a post-global financial crisis regulatory change in U.S. state insurance regulation related to external ratings of ABS being replaced by a rating based on book value minus modeled expected loss (via NAIC Securities Valuation Office).
  - Affiliated reinsurance transactions reduce tax rates paid by PE-influenced life insurers.

### Reinsurance, offshore reinsurers, and regulatory arbitrage
- Large PE companies have established offshore-based reinsurers, primarily in Bermuda, to buy or reinsure blocks of life insurance or annuity business and sometimes to purchase life and annuity companies through these reinsurers.
- Offshore reinsurers facilitate issuing insurance products, reinsuring them, and managing premiums, potentially limiting on-shore regulator visibility.
- Since January 2023, Bermuda Monetary Authority (BMA) requires approval of life reinsurance transactions before execution and requires comprehensive information; approvals granted only with nonobjection of the regulator of the cedant.
- Approval processes may be transaction-by-transaction and may not consider cumulative impacts; not all supervisors may have authority to require sufficient information.
- Many deals involve “modified coinsurance” or “coinsurance with funds withheld” (asset-intensive reinsurance), which are highly complex, less transparent, and can produce accounting windfalls; public financial reporting often does not reveal these transactions.

### Bermuda market growth, valuation differences, and BMA reforms
- PE-influenced reinsurers have grown assets and account for about half of assets of all long-term reinsurers in Bermuda.
- As of latest available data in 2021:
  - Bermuda long-term reinsurance assets grew to more than $1 trillion, about 4 percent of total life insurance assets globally, doubling their share compared to the previous four years.
- Bermuda Economic Balance Sheet (basis of Bermuda Solvency and Capital Requirement) differences relative to U.S. and Europe:
  - More generous discount rate allowances for valuation of technical provisions can recognize premium earned on illiquid investments when determining discount rate—often more frequently than in other regimes—via the scenario-based approach (SBA) for valuing liabilities applied at reinsurer option.
  - SBA can allow additional spread on liability discount curve to result in upfront profits booked as capital.
- Bermuda’s commercial reinsurance regime has been deemed fully equivalent to Solvency II by the European Union and granted full reciprocal jurisdiction status by the NAIC in the United States—creating incentives for cedants to reinsure to Bermuda-based insurers backed by fewer liquid assets.
- BMA consultations and proposed changes:
  - BMA consulted on requiring prior supervisory approval of SBA use only for new reinsurers and for existing reinsurers not using the SBA.
  - BMA proposed changes to risk management and governance requirements for SBA use and technical changes to better assess liquidity mismatches due to lapse risk.
  - Even if proposed reforms are fully implemented, circumstances may remain where SBA provides a relative benefit to Bermuda long-term reinsurers compared to direct writers in cedant markets.
  - BMA consultation is ongoing; a second consultation was published in July 2023. The final shape of reforms is not yet known. BMA stated discussions regarding reforms are ongoing with authorities that regulate cedant insurers using the Bermuda long-term reinsurance market.
  - BMA issued a stakeholder letter confirming most of the July consultation will be implemented with an additional five-year transition period for technical changes to the SBA; enhancements expected to be implemented on March 31, 2024.

### Evidence of vulnerabilities and regulatory responses
- NAIC finding: an insurer owning all tranches of a collateralized loan obligation with underlying assets of B-rated loans would have a substantial beneficial regulatory capital arbitrage compared to holding directly the underlying B-rated loans under existing RBC calculations for life insurers. NAIC is proposing additional designation categories and relevant RBC factors.
- PE-influenced life insurers are more vulnerable to adverse scenarios of increases in corporate defaults and credit downgrades if the economy slows because of higher interest rates; potential forced liquidation under rising regulatory capital charges could be severe.
- Private assets reduce the quality of capital due to valuation uncertainty and liquidity risk.
- Examples of distress and market effects:
  - Secondary market pricing for PE assets: 92 percent of net asset value in 2021 and 81 percent of net asset value in 2022.
  - Typical life insurer capital is about 10 percent of assets; this can be eroded much faster in stress.

### Box 1. Example transaction: Lincoln Financial Group and Fortitude Reinsurance Ltd.

- Transaction announced on May 2, 2023 between Lincoln Financial Group (Lincoln) and Fortitude Reinsurance Ltd.
- Transaction size: $28 billion.
- Composition of statutory reserves in the transaction:
  - approximately $9 billion of universal life with secondary guarantees statutory reserves (approximately 40 percent of Lincoln’s total in-force universal life with secondary guarantees)
  - close to $12 billion of universal life with long-term care rider statutory reserves (approximately 80 percent of Lincoln’s total in-force universal life with long-term care rider)
  - close to $8 billion of fixed annuities statutory reserves (approximately 40 percent of Lincoln’s total in-force fixed annuities)
- Lincoln’s stated rationale (quote): “Today’s transaction with Fortitude Re marks significant progress in our efforts to reduce our balance sheet risk, improve our capital position, and increase ongoing free cash flow.”
- Lincoln will service and administer the policies it reinsured to Fortitude Re; customers will see no change.

### PE fee income and strategic stakes (from Box 1)
- Average annual management fees estimated to be 1.76 percent and performance fees averaging 20.3 percent in 2018 and 2019 (DeLuce and Keliuotis 2020).
- Strategic alliances often do not involve significant balance sheet investment by the PE company but may involve a small strategic stake sufficient to secure a board seat or seats.
- Stakes purchased tend to be below the 10 percent threshold usually applied by supervisors for an approval process of significant shareholders.

### Data challenges and Annex 1
- Difficulty defining and identifying PE-influenced life insurers due to diverse business models and data quality limitations in public databases.
- Annex 1 attempts to identify PE-influenced life insurers; list likely incomplete but intended as a first global list to foster discussion among insurance supervisors and PE-influenced life insurers.
- Annex 1 construction: uses AM Best and S&P Capital IQ Pro M&A transaction deals data; transactions were documented and checked through news articles to ensure insurers were still operating and that there was no exit from the PE firm as of March 2023; limited to PE-influenced parent companies (subsidiaries excluded).

### Notable episode: Eurovita (Italy)
- IVASS identified a capital shortfall of €250 million in the midsize life insurer Eurovita.
- The owner, a PE, closed-end fund operated by Cinven, was unable to meet IVASS’s expectation for increasing capital.
- IVASS replaced management of Eurovita with an administrator and put a stop on policyholder redemptions initially until March 31, 2023.
- The stop on redemptions was extended many times until October 31, 2023, at the time of writing.
- The latest extension of orders related to a rescue deal for Eurovita announced on June 30 2023 involved five insurers and 25 banks.
- IVASS actions responded to a surge in surrenders by policyholders when it became clear the closed-end fund would not meet the capital investment required by IVASS.
- Press coverage of the Eurovita issue may encourage policyholders of other insurers to consider surrendering their life insurance policies in favor of other investments that now earn significantly higher returns than a year ago due to the rising interest rate environment (Fitch 2023).

### Coinsurance and coinsurance with funds withheld (technical points)
- A modified coinsurance arrangement involves the transfer of net policy liabilities to the reinsurer with the reinsurer required to indemnify the ceding insurer for the amount of the net policy liabilities, but assets necessary to support the reserve for the policies are maintained by the ceding insurer as are the reserves. The reserve is essentially a prepayment of the reinsurer’s future obligation.
- Coinsurance with funds withheld transfers the reserves to the reinsurer but not the assets.
- The reinsurer usually wants some control over assets held on the ceding insurer’s balance sheet in both these forms of coinsurance and may exercise that control through appointing an asset manager (which may be related to the reinsurer) for the identified portfolio of assets.

### Exposure and illiquidity metrics (selected figures)
- PE-influenced life insurer asset share in U.S.: may be exceeding 10 percent of total industry assets.
- PE fee estimates: average annual management fees 1.76 percent; performance fees averaging 20.3 percent (2018 and 2019).
- Life insurer capital typically about 10 percent of assets.
- Bermuda long-term reinsurance assets (2021): more than $1 trillion; about 4 percent of total life insurance assets globally.
- Secondary market pricing for PE assets: 92 percent of net asset value in 2021 and 81 percent of net asset value in 2022.

*Global Financial Stability Note: Introduction (gfsnea2023001) — INTERNATIONAL MONETARY FUND*

### Introduction ...........................................................................................................

### Introduction

### Introduction
- The traditional life insurance industry has faced a challenging macroeconomic environment in the past two decades because of prolonged low interest rates.
- Low interest rates:
  - Put pressure on the viability of life insurers offering guaranteed rates of return on their products.
  - Made guaranteed-return products less attractive to policyholders as investment returns declined.
- Economic valuation and economic capital requirements exposed the high capital intensity of traditional, guaranteed return life insurance products for which the insurer bears investment, mortality, and longevity risks.
- Many large insurance groups pivoted away from capital-intensive business lines toward capital-light business such as unit-linked products, leaving much of the investment risk with policyholders.
- Private equity (PE) companies acquired and gained exposure to long-term, capital-intensive liabilities on life insurers’ balance sheets that originators sought to exit—deploying new private capital to support traditional fixed annuity products.
- Changes observed in PE-owned life insurers:
  - Increased illiquid investments in complex structured products used to fund leverage in other sectors of the economy.
  - Active use of reinsurance to reduce longevity risks and long-term liabilities, releasing more capital to invest in riskier assets.
- This Global Financial Stability Note (GFSN) studies PE investments into the life insurance industry, reviewing:
  - Growth in PE investments.
  - Diverse acquisition incentives and strategies.
  - Consequent changes to asset allocation and investment strategies of acquired life businesses.
  - Potential prudential and policy implications.

### I. The Growth of Private Equity and Private Debt
- PE assets under management (AUM) and fundraising:
  - AUM of PE companies almost tripled during 2016–22, reaching close to $12 trillion as of mid-year 2022.
  - Annual capital raised for PE strategies and the number of funds increased by more than 60 percent between 2008 and 2022.
  - Funds raised had significant volatility: trough in 2010 with only $205 billion and peak in 2021 with $830 billion.
  - PE companies rely on frequent fundraising, with typical tenor of funds raised ranging from 5 to 10 years.
- Industry concentration and geography:
  - As of end-2022, the top 10 PE companies accounted for 31 percent of global AUM.
  - The top three companies (Blackstone, Apollo, and KKR) represented 19 percent of worldwide AUM.
  - The PE industry is US-centric:
    - US companies account for about half of all PE companies and more than 70 percent of global AUM.
    - Footnote data: as of the end of 2022, about 1,094 PE companies exist globally, with AUM more than $1 million. Of these, 534 are based in the United States.
- Investor demand and allocations:
  - Limited partners (public and private pension funds, insurers, endowments, sovereign wealth funds) increased portfolio allocations to PE over the past five years.
  - Sovereign wealth funds increased their portfolio allocation to PE from 10 percent to 17 percent during 2017–22.
  - PE index returns outperformed other asset classes after 2015.
- US public pension funds (PPFs):
  - Average fund size rose from $14 billion in 2001 to almost $32 billion in 2022.
  - Percentage of PPFs with exposure to PE grew from 50 to 80 percent during 2001–2015, before stabilizing.
  - Allocation level increased from about 6 percent of total assets in 2001 to 16 percent in 2022, accelerating over the past two years.
  - In 2021 and 2022, the PE allocation share was well above the average allocation target of 10.5 and 11 percent, respectively.
  - PPF PE portfolio returns have been more volatile than other PPF asset classes; in 2021 PPF PE portfolio annual returns peaked at about 45 percent before declining to 20 percent.
  - Note on above-target allocations in 2021 and 2022:
    - In 2021, due to low interest rates and the search for yield leading to the highest level of capital raised ($830 billion).
    - In 2022, due to a moderate decline in capital raised while all public market assets declined significantly in value (denominator effect).
- 2022 slowdown:
  - PE experienced a slowdown in 2022 as investors exceeded allocation targets and fixed income became more attractive with higher interest rates.
  - Capital raised by PE decreased by 12 percent between 2021 and 2022.
  - Number of funds fell by more than one-third to 1,520 funds.
- Shift toward private credit:
  - Decline in LBO funding spurred PE companies to increase private credit activities.
  - Banks reduced financing of LBOs significantly in 2022, and private credit funds filled the void via direct funding of LBOs or purchase of bank-originated LBO debt.
  - Example: KKR’s acquisition of 60 percent of Global Atlantic (a US life insurer) in 2020 cost KKR approximately $3 billion.
    - KKR estimated this transaction increased its fee-paying AUM by 48 percent and expected to increase fee income by $200 million per year or more.

### II. PE and Insurers
- Historical context and increasing activity:
  - PE involvement with life insurers dates to the 1980s, with increased activity since the global financial crisis.
  - Initially, life insurers were targets of traditional LBO transactions; relationships are now more complex with multiple PE strategies.
- Range of PE strategies in relation to life insurers:
  - PE companies own a small strategic stake in a life insurer (often less than 10 percent) and provide specialist investment management services (structured credit, private credit, private real estate, private equity). These are sometimes described as strategic alliances.
  - Life insurers purchased and owned by LBO schemes arranged by PE funds (traditional PE model).
  - Full or majority ownership of life insurers held by PE companies on their balance sheets for strategic importance to other PE activities.
  - Life insurers heavily using offshore life reinsurers owned by PE companies to reinsure life insurance portfolios and strategically restructure businesses.
- Traditional LBO mechanics and recent funding shifts:
  - PE fund (general partner) raises capital from limited partners (public and private pension funds, sovereign wealth funds, endowments, insurance companies).
  - Once target investment is raised, the closed-end fund uses leveraged financing (traditionally provided by banks) to buy companies—including life insurers.
  - Leveraged buyouts typically expect exits within the closed fund horizon (typically within 10 years).
  - From late 2022 onward, banks significantly reduced funding of LBOs, lowering LBO deal volumes and increasing private credit involvement.
- PE companies’ incentives and outcomes:
  - PE involvement gives control and stable supply of a substantial long-term asset base to manage and derive fee income.
  - Investment allocation of PE-influenced life insurers is skewed toward illiquid investments compared with other life insurers.
- Use of offshore reinsurers and consolidation platforms:
  - PE firms use ownership of life insurers and offshore reinsurers as platforms to acquire other life insurers or assets through transfers or reinsurance transactions.
  - Bringing together smaller books of business into a larger business to derive synergies and efficiencies (including investment in technology) is a common strategy.
- Definition:
  - The term “PE-influenced life insurers” generically refers to all four strategies described above.

*Global Financial Stability Note: Introduction (gfsnea2023001) — INTERNATIONAL MONETARY FUND*

### Box 1. Example of Unrelated Life Insurers Engaging the Services of PE-

### Box 1. Example of Unrelated Life Insurers Engaging the Services of PE-Influenced Reinsurers

### Example transaction and rationale
- Transaction announced on May 2, 2023 between Lincoln Financial Group (Lincoln) and Fortitude Reinsurance Ltd.
- Transaction size: $28 billion.
- Composition of statutory reserves in the transaction:
  - approximately $9 billion of universal life with secondary guarantees statutory reserves (approximately 40 percent of Lincoln’s total in-force universal life with secondary guarantees)
  - close to $12 billion of universal life with long-term care rider statutory reserves (approximately 80 percent of Lincoln’s total in-force universal life with long-term care rider)
  - close to $8 billion of fixed annuities statutory reserves (approximately 40 percent of Lincoln’s total in-force fixed annuities)
- Lincoln’s stated rationale (quote): “Today’s transaction with Fortitude Re marks significant progress in our efforts to reduce our balance sheet risk, improve our capital position, and increase ongoing free cash flow.”
- Lincoln will service and administer the policies it reinsured to Fortitude Re; customers will see no change.

### PE fee income and strategic stakes
- Average annual management fees estimated to be 1.76 percent and performance fees averaging 20.3 percent in 2018 and 2019 (DeLuce and Keliuotis 2020).
- Strategic alliances often do not involve significant balance sheet investment by the PE company but may involve a small strategic stake sufficient to secure a board seat or seats.
- Stakes purchased tend to be below the 10 percent threshold usually applied by supervisors for an approval process of significant shareholders.

### Data challenges and Annex 1
- Difficulty defining and identifying PE-influenced life insurers due to diverse business models and data quality limitations in public databases.
- Annex 1 attempts to identify PE-influenced life insurers; list likely incomplete but intended as a first global list to foster discussion among insurance supervisors and PE-influenced life insurers.
- Annex 1 construction: uses AM Best and S&P Capital IQ Pro M&A transaction deals data; transactions were documented and checked through news articles to ensure insurers were still operating and that there was no exit from the PE firm as of March 2023; limited to PE-influenced parent companies (subsidiaries excluded).

### Asset allocation and growth of PE-influenced life insurers
- Assets of PE-influenced life insurers have grown significantly and may be exceeding 10 percent of total industry assets in the United States.
- PE-influenced life insurers have fewer liquid investments than the aggregate of all insurers; U.S. data show greater allocations to:
  - structured credit such as collateralized loan obligations,
  - mortgage loans,
  - private commercial and residential mortgage-backed securities.
- Greater investment in structured and private credit worsens liquidity mismatches between assets and liabilities and could complicate portfolio liquidation if facing margin calls, repo contracts, or policy surrenders.

### Incentives, risks, and vulnerabilities
- PE transactions expect performance transformation via increased spread earned on illiquid investments and fee income from managing those investments.
- Increased exposure to illiquid assets may be incentivized by PE firms providing specialist in-house investment management for structured credit, private credit, private real estate, and PE investments.
- PE-influenced life insurers are more vulnerable to adverse scenarios of increases in corporate defaults and credit downgrades if the economy slows because of higher interest rates; potential forced liquidation under rising regulatory capital charges could be severe.
- Embedded leverage in structured-credit investments (e.g., collateralized loan obligations) can aggravate severity.
- NAIC finding: an insurer owning all tranches of a collateralized loan obligation with underlying assets of B-rated loans would have a substantial beneficial regulatory capital arbitrage compared to holding directly the underlying B-rated loans under existing RBC calculations for life insurers. NAIC is proposing additional designation categories and relevant RBC factors.
- Typical life insurer capital is about 10 percent of assets; this can be eroded much faster in a scenario of rapid increases in corporate defaults.
- Herding behavior: insurers on aggregate have doubled their illiquid investments over the past decade at a global level (share of Level III assets for a sample of 50 large insurers).
- Private assets introduce valuation uncertainty and liquidity risk:
  - private debt counterparties may be unable to access bank funding or public debt; average credit risk may be higher than public assets.
  - published valuations of private assets do not respond to market conditions as readily as traded assets, increasing risk of sharper, faster price adjustments when losses are crystallized.
  - Example: secondary market for PE assets priced at 92 percent of net asset value in 2021 and fell to 81 percent of net asset value in 2022 (Jeffries LLC 2023).
- Life insurer capital typically 10 percent or less of assets; large allocations to private assets with valuation uncertainty reduce the quality of that capital.
- Use of leverage to fund illiquid assets has increased, evidenced by greater use of nontraditional liabilities such as funding-agreement-backed securities.

### Evidence on changes after PE takeovers
- When PE companies gain control of life insurers, they quickly change investment portfolios and enter affiliated reinsurance transactions.
- Kirti and Sarin (2020) findings:
  - PE-influenced insurers decrease their share of corporate bonds by more than 7 percentage points and increase private-label ABS holdings by more than 6 percentage points within a year after takeover.
  - PE-influenced insurers more aggressively exploited a post-global financial crisis regulatory change in U.S. state insurance regulation related to external ratings of ABS being replaced by a rating based on book value minus modeled expected loss (via NAIC Securities Valuation Office).
  - Affiliated reinsurance transactions reduce tax rates paid by PE-influenced life insurers.

### Reinsurance, offshore reinsurers, and regulatory arbitrage
- Large PE companies have established offshore-based reinsurers, primarily in Bermuda, to buy or reinsure blocks of life insurance or annuity business and sometimes to purchase life and annuity companies through these reinsurers.
- Offshore reinsurers facilitate issuing insurance products, reinsuring them, and managing premiums, potentially limiting on-shore regulator visibility.
- Since January 2023, Bermuda Monetary Authority (BMA) requires approval of life reinsurance transactions before execution and requires comprehensive information; approvals granted only with nonobjection of the regulator of the cedant.
- Approval processes may be transaction-by-transaction and may not consider cumulative impacts; not all supervisors may have authority to require sufficient information.
- Many deals involve “modified coinsurance” or “coinsurance with funds withheld” (asset-intensive reinsurance), which are highly complex, less transparent, and can produce accounting windfalls; public financial reporting often does not reveal these transactions.

### Bermuda market growth, valuation differences, and BMA reforms
- PE-influenced reinsurers have grown assets and account for about half of assets of all long-term reinsurers in Bermuda.
- As of latest available data in 2021:
  - Bermuda long-term reinsurance assets grew to more than $1 trillion, about 4 percent of total life insurance assets globally, doubling their share compared to the previous four years.
- Bermuda Economic Balance Sheet (basis of Bermuda Solvency and Capital Requirement) differences relative to U.S. and Europe:
  - More generous discount rate allowances for valuation of technical provisions can recognize premium earned on illiquid investments when determining discount rate—often more frequently than in other regimes—via the scenario-based approach (SBA) for valuing liabilities applied at reinsurer option.
  - SBA can allow additional spread on liability discount curve to result in upfront profits booked as capital.
- Bermuda’s commercial reinsurance regime has been deemed fully equivalent to Solvency II by the European Union and granted full reciprocal jurisdiction status by the NAIC in the United States—creating incentives for cedants to reinsure to Bermuda-based insurers backed by fewer liquid assets.
- BMA consultations and proposed changes:
  - BMA consulted on requiring prior supervisory approval of SBA use only for new reinsurers and for existing reinsurers not using the SBA.
  - BMA proposed changes to risk management and governance requirements for SBA use and technical changes to better assess liquidity mismatches due to lapse risk.
  - Even if proposed reforms are fully implemented, circumstances may remain where SBA provides a relative benefit to Bermuda long-term reinsurers compared to direct writers in cedant markets.
  - BMA consultation is ongoing; a second consultation was published in July 2023. The final shape of reforms is not yet known. BMA stated discussions regarding reforms are ongoing with authorities that regulate cedant insurers using the Bermuda long-term reinsurance market.
  - BMA issued a stakeholder letter confirming most of the July consultation will be implemented with an additional five-year transition period for technical changes to the SBA; enhancements expected to be implemented on March 31, 2024.

### Exposure and illiquidity metrics (selected figures from Box)
- PE-influenced life insurer asset share in U.S.: may be exceeding 10 percent of total industry assets.
- PE fee estimates: average annual management fees 1.76 percent; performance fees averaging 20.3 percent (2018 and 2019).
- Life insurer capital typically about 10 percent of assets.
- Bermuda long-term reinsurance assets (2021): more than $1 trillion; about 4 percent of total life insurance assets globally.
- Secondary market pricing for PE assets: 92 percent of net asset value in 2021 and 81 percent of net asset value in 2022.

*GLOBAL FINANCIAL STABILITY NOTES — Private Equity and Life Insurers, INTERNATIONAL MONETARY FUND.*

### 1.  Bermuda Reinsurance Long-Term Assets and Share of Total Global

### 1.  Bermuda Reinsurance Long-Term Assets and Share of Total Global Life Insurance Assets

### Bermuda reinsurers’ exposure and measurement
- The Bermuda reinsurers series in panel 1 is based on the sample of six PE-influenced reinsurers in Table 1.
- Panel 2 data are dated as of the latest available annual reports.
- The global insurers category in panel 2 includes a sample of 50 selected insurance groups from 18 jurisdictions across Europe, North America, Asia, and Australia.
- Level 3 assets are those considered to be the most illiquid and hardest to value. Their values are typically estimated using a combination of complex market prices, mathematical models, and subjective assumptions.
- PE = private equity.

### Notable episode: Eurovita (Italy)
- IVASS identified a capital shortfall of €250 million in the midsize life insurer Eurovita.
- The owner, a PE, closed-end fund operated by Cinven, was unable to meet IVASS’s expectation for increasing capital.
- IVASS replaced management of Eurovita with an administrator and put a stop on policyholder redemptions initially until March 31, 2023.
- The stop on redemptions was extended many times until October 31, 2023, at the time of writing.
- The latest extension of orders related to a rescue deal for Eurovita announced on June 30 2023 involved five insurers and 25 banks.
- The IVASS actions responded to a surge in surrenders by policyholders when it became clear the closed-end fund would not meet the capital investment required by IVASS.
- Press coverage of the Eurovita issue may encourage policyholders of other insurers to consider surrendering their life insurance policies in favor of other investments that now earn significantly higher returns than a year ago due to the rising interest rate environment (Fitch 2023).

### Coinsurance and coinsurance with funds withheld (technical points)
- A modified coinsurance arrangement involves the transfer of net policy liabilities to the reinsurer with the reinsurer required to indemnify the ceding insurer for the amount of the net policy liabilities, but assets necessary to support the reserve for the policies are maintained by the ceding insurer as are the reserves. The reserve is essentially a prepayment of the reinsurer’s future obligation.
- Coinsurance with funds withheld transfers the reserves to the reinsurer but not the assets.
- The reinsurer usually wants some control over assets held on the ceding insurer’s balance sheet in both these forms of coinsurance and may exercise that control through appointing an asset manager (which may be related to the reinsurer) for the identified portfolio of assets.

### Key statistics and samples (exact figures preserved)
- Sample of six PE-influenced reinsurers used for Bermuda series in panel 1.
- Global insurers sample: 50 selected insurance groups from 18 jurisdictions.
- Eurovita capital shortfall: €250 million.
- Initial redemption stop date: March 31, 2023.
- Extended redemption stop date: October 31, 2023.
- Rescue deal announced on June 30 2023 involved five insurers and 25 banks.

*Italic: Source — gfsnea2023001 - 1.  Bermuda Reinsurance Long-Term Assets and Share of Total Global Life Insurance Assets (IMF staff content provided).*

---


_Source: https://www.imf.org/-/media/files/publications/gfs-notes/2023/english/gfsnea2023001.pdf_