Letter to ERISA Advisory Council on Private Equity and Life Insurance and Annuity Companies

July 11, 2023

Christine Donahue, Executive Secretary,
ERISA Advisory Council
July 6, 2023
Dear Ms. Donahue,

I am Dr. Eileen Appelbaum, Co-Director of the Center for Economic and Policy Research in Washington, DC. I have been studying private equity’s role in the U.S. economy since 2010. In 2014 I co-authored an award-winning book, Private Equity at Work: When Wall Street Manages Main Street. I have continued investigating the industry’s role in many sectors of the economy in the nine years since then.

On January 13, 2022, I published a report titled “Beware of Private Equity Gobbling Up Life Insurance and Annuity Companies” (https://cepr.net/report/beware-of-private-equity-gobbling-up-life-insurance-and-annuity-companies/). The report made several key points.

  1.  Private equity firms are attracted to annuity life insurance companies and target them for takeover because of the large size of their assets, which are a source of ‘permanent capital’ that the PE firm can use for riskier equity and debt investments.

  2. Riskier investments are expected to yield higher returns. But annuity policyholders may not benefit, either because the investment fails or because higher fees eat up the increase in earnings. These assets include highly leveraged companies that have to refinance their debt every few years. Debt taken on in a low interest rate environment may be difficult or impossible to refinance, as we see in the current environment where the interest rate has increased rapidly. Defaults on this debt and even bankruptcy may occur. Debt funds are another risky asset class that are sponsored by the largest PE firms, including KKR, Blackstone and Carlyle. These PE firms also manage significant annuity insurance company assets.

  3. At the end of 2020, PE firms controlled nearly 10 percent of life insurance assets, a total of $471 billion. Apollo owns Athene’s assets worth about $194 billion. In 2021, Blackstone managed $50 billion of AIG assets, scheduled to increase to $100 billion. Blackstone also bought Allstate’s annuity life insurance business and, by the end of 2021, was managing $150 billion.

  4. PE interest in owning annuity insurance companies has not abated in the year and a half since the report came out. As recently as the last week of June 2023, PE firm Brookfield Asset Management made a offer to buy American Equity Investment Life for $4.3 billion (see https://www.ft.com/content/06bb4967-7d38-46f1-9078-f8761814c8af).

Regulating PE investments is challenging because of the lack of transparency and, in particular, the lack of  reliable information about how these firms invest insurance assets. Returns on private debt are usually higher than for plain vanilla bonds, but they are less transparent and more difficult to trade, making them difficult to sell to meet death benefit and annuity obligations, most pronounced in the case of an economic slowdown and cash crunch. The Federal Reserve has expressed concern that investments in difficult to sell debt and equity holdings may mean that insurers will lack cash to pay a surge of claims in an economic crisis. Not only do the assets lack liquidity, but they may also go down in value in these circumstances. The lack of caps on fees paid for acquiring more complex and risky assets can eat into returns to policyholders. A lack of national standards for reserves against more risky assets in the portfolios of companies managing the life insurance and retirement benefits of workers also poses potential problems.

Based on the analysis in my 2022 report, I propose the following ERISA guidelines to address concerns about the safety of investments of workers’ retirement savings in annuity products and reduce the riskiness of these investments.

Investment management fees paid to a PE firm. In addition to considering the “quality and diversification of the annuity provider’s investment portfolio,” as is currently provided for in Interpretive Bulletin 95-1, a fiduciary should consider whether the fees paid for the management of portfolio assets invested in alternative investments (especially when managed by a PE firm with an ownership interest in the insurer) create an added risk that portfolio earnings will fall below expectations. 

Level of reserves and information about the credit ratings for Insurers Holding Riskier Assets. In considering “the level of the insurer’s capital and surplus,” as is currently provided for in Interpretive Bulletin 95-1, a fiduciary also should consider whether a higher level of reserves is appropriate for insurers with significant allocations of their investment portfolios to alternative investments that come with greater risk, compared to insurers that do not have such allocations or as great an allocation.

Self-dealing and other conflicts of interest. In considering the “quality and diversification of the annuity provider’s investment portfolio,” as is currently provided for in Interpretive Bulletin 95-1, a fiduciary should consider the risks created by self-dealing or other conflicts of interest when an insurer is owned by a PE firm or at least some of the insurer’s portfolio is managed by a PE firm. PE firms using insurance assets to shore up the finances of failing or struggling funds they own could harm participants and beneficiaries by creating unforeseen risk.

Thank you for considering my recommendations.


Eileen Appelbaum

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