Private equity and insurance

There are indeed many risks associated with private-equitybacked insurers (“Private assets, public interest”, January 27th). As you say, “pension promises matter to society” and accordingly, regulators should take notice. Upon instructions from Congress, the Department of Labour has done just that, holding public sessions to discuss the increasingly large role that private-equity-backed insurers are playing in the pension risk transfer (PRT) market.

Financial markets corroborate your concern. Whether because of regulatory arbitrage, riskier or illiquid investments, and other factors, private-equity-backed insurers are deemed riskier than traditional insurers, as measured by the credit spread of their bonds. Conveniently, many insurers issue Funding Agreement-Backed Notes (FABNs) to the institutional bond market. FABNs are on an equal footing with policies issued by the insurance companies, so they represent an observable, market-based measure of the policy-level risk of the insurer.

Our recent study of the largest PRT providers showed that the two-private equitybacked insurers in that group stood out as a higher risk, trading at spreads as much as one percentage point higher than that of the highest quality insurers. These spread levels are comparable to those of companies rated BBB or BBB-. We think an evaluation of credit spreads aligns well with Department of Labour guidance that requires fiduciaries to choose the “safest available annuity”, and have recommended as much to the department as part of its review of the PRT market. The power and insight of market forces strongly supports your thesis.

David Eichhorn

Chief executive and head of investment strategies

NISA Investment Advisors

St Louis