As Private Equity Sets its Sights on Life Insurers, What are the Credit Rating Implications?

Morningstar DBRS published a commentary discussing the potential credit rating implications associated with private equity (PE)-backed insurers.

Key highlights include the following:

-- Private equity companies' involvement in life insurance has intensified over the recent period, resulting in their control or influence over some of the largest players in the U.S. individual annuity sector.

-- By entering into reinsurance agreements designed to de-risk balance sheets of traditional life insurers, PE-related insurers are positively contributing to the insurance market efficiency.

-- PE-owned insurers are more likely to face negative credit ratings pressure if their asset allocation and related governance decisions benefit the business model of their owners at the expense of reduced policyholder-paying ability.

“PE firms, owing to their appetite for long-term, large, and stable sources of capital have become valuable partners to traditional insurers, facilitating various types of reinsurance and/or sale agreements,” said Nadja Dreff, SVP, Head of Canadian Insurance. “While there are some benefits and positive market implications associated with PE-backed insurance activities, there also may be factors where PE's influence may negatively affect credit ratings of PE-backed insurance companies…Credit ratings would be negatively affected only if business model changes were significant enough to adversely affect insurers' ability to satisfy their policyholder obligations.”