Insurers continued to grow despite lower returns & interest rates

In contrast to public insurers’ drive to minimise balance sheets and pursue fee revenues, mutual insurers continued to offer traditional protection and savings products despite the constraints of low interest rates, according to Swiss Re / sigma report Global Life Insurance Industry in 2024.

With policyholder ownership, mutual insurers’ primary purpose is to provide attractive returns and useful products to members over time, rather than meet short-term profit expectations or provide a return on capital for external investors.

Their decision-making is typically based on a longer timeframe and is less affected by the leveraged impact of risk-free rates on return on equity.

This approach led to stronger organic growth and higher net investment income. From 2012 to 2023, US mutual insurers saw a 73% increase in net investment income, with their investment portfolios nearly doubling in size.

Gains in net premiums also boosted mutuals’ growth in net investment income.

Fee income for mutual insurers rose by about 32%, compared to 23% for stock insurers, indicating potential scale advantages.

If rates stay high, insurers with large balance sheets supporting general account liabilities can achieve greater earnings relative to their cost of capital over time.

Growth in net premiums, net investment income and fee earnings for stock and mutual insurers

The decline in interest rates also changed life insurance asset management. To offset low interest rates after the financial crisis, life insurers, like many other investors, grew their exposures to higher yielding asset classes.

The hunt for yield turned insurers in Europe, North America, and Asia to assets such as structured and private credit, floating rate loans, longer duration securities and looking abroad for markets with higher-yield investment opportunities.

Companies that tap the private credit market also tend to be smaller and carry more debt relative to earnings than counterparts with publicly traded bonds.

Private credit usually has floating rates, while public debt typically has fixed rates. Rising interest rates boost yields for floating-rate debt but also increase risks. Higher payments can lead to more covenant breaches and defaults. Despite this, borrowers have remained resilient in the current cycle.

From 2017 to 2023, US life insurers reduced direct corporate debt holdings, shifting towards real estate and alternative investments.

US life insurance industry portfolio allocations

US interest rates and L&H insurance industry portfolio yield

By the end of 2023, securitizations, real estate, and other alternatives made up 39% of investment portfolios, up from 34% in 2017. Bond portfolio durations increased, averaging 11 years to maturity in 2022, compared to nine years in 2008.

Allocation to private placement securities has also risen over the period to 43% of fixed income investments from 24%. This trend towards greater private placement is not unprecedented and we expect it has further room to grow.

European life insurers have also allocated more to higher yielding private and illiquid assets. Swiss Re estimate that about 15% of European insurers’ portfolios backing traditional saving product liabilities were invested in illiquid assets and potentially risky exposures in 2023, up from 8% in 2017.

About a third (30%) of assets were allocated to pooled third-party private assets funds including real estate, infrastructure, and PE in 2023, up from 23% in 2017.

European life insurance industry portfolio allocations

European life insurers’ estimated illiquid and risky investments

In the UK, life insurers hold about a 25% allocation to illiquid credit, primarily in commercial mortgages, infrastructure debt and private debt. Meanwhile, capital quality has remained relatively stable since 2017, according to data published by the Bank of England.

Drivers for the rise of private equity

Private equity players met the demand of stock insurers seeking to pivot away from their legacy business. Regulatory changes after the global financial crisis, which accelerated non-bank lending as a new asset class, supported the move.

These companies seized an opportunity to establish a foothold in the life segment, expand their asset base and grow private lending operations in a hunt for yield that was impacting the broader asset management industry.

Both liability originators and consolidators focus on accumulating annuity liabilities, typically using affiliated offshore reinsurance to lighten capital requirements. Originators focus on reinsurance business (flow or closed block) and have manufacturing and distribution capabilities, while consolidators focus on reinsuring runoff business.

Companies following the insurance asset management strategy primarily rely on insurers’ desire for higher investment returns and demand for increased direct origination / private credit capabilities to grow through investment management agreements.

Swiss Re estimate that private equity-affiliated reinsurance vehicles have accumulated more than USD 1 trillion in global life insurance assets since 2009. Although most have been acquired from US carriers, a significant amount are from Europe.

The private equity industry overall is US-centric as well, with US companies accounting for more than 70% of global assets under management, and seven of the top 10 global PE firms based in the US.

Growth in PE-owned life insurers has been particularly high for the last six years with 11 of the top 18 vehicles formed since 2018. Listed life insurers have ceded these assets as blocks of business to enable a strategic realignment of their business and/or to de-risk their balance sheets.

Private equity in Europe: opportunity and barriers to entry

With over EUR 4 trillion of liabilities to tap, the European life sector offers significant potential for consolidation due to its fragmented markets and distribution networks. PE vehicles have entered the European life market in small numbers.

Since 2010, we estimate that there have been 54 transactions with PE influence, accounting for 7% of all reported M&A activity.

Life insurance liabilities in Europe

Number of PE-influenced deals in Western Europe

Initially dominated by majority stake acquisitions, the activity has evolved towards minority and asset/branch consolidations. Transaction value has surged since 2019 after a series of landmark deals in the Netherlands, the UK, Germany and Italy.

Establishing a presence in the European life insurance market presents several challenges due to significant entry barriers. In France, large bancassurance and insurance groups dominate the market, utilizing established broker networks and work-based arrangements. Local employment laws further complicate entry for foreign companies.

In Germany, life insurance companies are looking to offload legacy portfolios that require substantial capital. This creates opportunities for consolidators, but they must adhere to conservative reserving rules. Italy’s market has seen significant consolidation recently, including involvement from private equity players.

In the UK, higher interest rates have improved funding levels in defined benefit pension schemes, leading to record buyouts worth GBP 49 billion in 2023, a 73% year-over-year increase, according to the Association of British Insurers (ABI). De-risking volumes are expected to peak in 2026–27.

In the Netherlands, pension reforms in 2023 have paved the way for an estimated EUR 1.5 trillion in pension risk transfer (PRT) transactions, with three transactions already completed.