What Private Equity Does Differently: Evidence from Life Insurance.

This article examines how private equity (PE) firms create value in the life insurance industry, where PE investments grew tenfold from 2009 to 2014, primarily by exploiting regulatory and tax arbitrage opportunities. PE-owned insurers rapidly shift their bond portfolios toward higher-yielding, lower-rated private-label asset-backed securities (ABS) without corresponding increases in capital charges, enabled by a postcrisis regulatory change, and engage in "shadow insurance" reinsurance arrangements with foreign affiliates to reduce tax liabilities. While consumers initially benefit from more favorably priced fixed annuity products offered by PE-backed insurers, these firms hold less capital relative to risk, increasing expected losses scaled by capital buffers by 50 percentage points and potentially exposing consumers to greater risk in downturns. The study finds no evidence that PE firms possess superior investment skill in corporate bonds but highlights their aggressive response to regulatory incentives, suggesting nuanced welfare implications that challenge simplistic views of PE as either wholly beneficial or harmful.