What Private Equity Does Differently: Evidence from Life Insurance

57 Pages Posted: 19 Feb 2020 Last revised: 14 Jul 2020

See all articles by Divya Kirti

Divya Kirti

International Monetary Fund (IMF)

Natasha Sarin

University of Pennsylvania Carey Law School

Date Written: February 14, 2020

Abstract

How do private equity firms impact their portfolio companies? We study this question using comprehensive data on their investments in the life insurance industry, which grew ten-fold from $23 billion to $250 billion between 2009 and 2014. Private equity-backed insurers exhibit superior returns. But there is no evidence that this is a consequence of general partners' skill. Rather, private equity firms increase the asset risk of their subsidiaries without commensurate capital charges and decrease tax liabilities. Results based on high-frequency event studies and matching techniques support a causal interpretation. Indeed, private equity firms deliver these changes to their subsidiaries within days of taking over. This improves insurers' performance, but also introduces risks that rating agencies appear to ignore.

Keywords: insurance, private equity, reaching-for-yield, financial crisis

JEL Classification: G22, G24, G11, G28, G32

Suggested Citation

Kirti, Divya and Sarin, Natasha, What Private Equity Does Differently: Evidence from Life Insurance (February 14, 2020). U of Penn, Inst for Law & Econ Research Paper No. 20-17, Available at SSRN: https://ssrn.com/abstract=3538443 or http://dx.doi.org/10.2139/ssrn.3538443

Divya Kirti

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Natasha Sarin (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

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