Insurers are increasingly owned by financial conglomerates that also own credit originators. This structure places large pools of policyholder-backed capital within the same organization as credit businesses that require funding. We study how this integration shapes insurer investment using novel data linking ownership structures to insurers’ holdings, transactions, and regulatory stress tests. Insurers owned by private equity (PE) firms allocate over 40% of their new investments to structured securities, more than 60% of which are issued by affiliated entities owned by the same PE firm. When investing with affiliates, PE-owned insurers purchase harder-to-value securities and pay higher prices for the same security. Moreover, they provide more persistent capital to affiliated issuers, impairing and selling underwater investments less frequently. PE-owned insurers’ affiliated investments do not subsequently perform better: they have lower fair values within two years of purchase and substantially greater downside risk in regulatory stress tests. We estimate that, under a 2008 financial crisis scenario, this additional risk would reduce insurer capital by 4 percentage points beyond the baseline stress loss. Overall, our findings show that integrating capital supply and demand within the same organization has implications for policyholders and financial stability.
Jinqing (Bella) Shan
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- Primary Email:
jinqings@wharton.upenn.edu
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1360 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
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