Introduction
Strategic relationships between insurance companies and sponsors have become a distinct part of the insurance industry landscape, marrying the parties’ complementary strategic needs: insurance companies obtain access to complex asset classes and enhanced returns, while sponsors benefit from long-term, long-duration capital. But while these transactions are commercially attractive, they are also highly structured, heavily negotiated and operationally intensive.
In their basic form, these strategic relationships include an equity investment by the sponsor in the insurance company’s parent and the simultaneous entry by the sponsor and the insurance company into a long-term investment management relationship, typically focusing on complex and illiquid asset classes. This relationship is effectuated by the terms of three key documents: an equity purchase agreement, a commitment letter defining the long-term relationship, and an investment management agreement (IMA). However, the path from commercial understanding to definitive documents and to an effective, operational relationship is often a winding one, dotted with potential land mines. This note highlights the key issues sponsors should consider during their journey.
Regulatory Analysis: A Question of “Control”
The most critical gating question in structuring a strategic relationship between a sponsor and an insurance company is whether the sponsor is willing to “control” the insurance company from an insurance regulatory perspective. Becoming a controlling person of an insurance company has numerous implications for the sponsor, including both up-front and ongoing regulatory requirements. Up front, the sponsor must navigate an involved approval process (which may significantly delay the transaction). On a go-forward basis, a control person is subject to periodic reporting obligations and requirements to obtain regulatory approval before entering into arrangements with the insurer. If the sponsor is willing to become a control person, the entire transaction will be subject to regulatory scrutiny. If the sponsor prefers to remain below the control threshold, the strategic relationship must be carefully structured to avoid an unintended finding of control.
In the United States, state insurance law presumes that control exists if a person directly or indirectly holds 10% or more of the voting securities of any insurer. However, the control analysis is not purely quantitative—the National Association of Insurance Commissioners and certain state regulators have reiterated their view that control should be evaluated on the totality of the facts and circumstances; in other words, a person can be found to “control” an insurance company while holding less than 10% of the voting securities if other factors, such as non-customary minority shareholder rights or IMAs with onerous or costly termination provisions, allow a person to exercise a controlling influence over the insurer.
Because the insurance regulatory control analysis is not black and white, regulators encourage parties to consult with them early in the process. Where the facts present a close call, the sponsor may consider pursuing a disclaimer of control (which may or may not be granted, depending on the facts).
Equity Investment: Aligning Interests While Limiting Regulatory Risk
As noted, an equity investment by the sponsor into the insurance company parent is a cornerstone of the parties’ strategic relationship. This serves a dual purpose—providing the insurer with growth capital and aligning the parties’ long-term incentives. To that end, the parties are likely to agree to a minimum equity hold period with restrictions on transfer thereafter. Parties also sometimes consider minority investments by the insurance company in the sponsor as an alternate or additional way of aligning interests.
Minority investments by the sponsor are most commonly structured as purchases of common equity. Where the sponsor is seeking to avoid the presumption of control, the parties will typically cap the sponsor’s voting ownership at 9.9%. To avoid other indicia of control, the equity purchase agreement is likely to include: (i) minimal governance rights; (ii) no board seat or, in some cases, a board observer (depending on overall risk analysis); and (iii) standstill provisions or voting agreements.
Commitment Letter: Driving Economics
The commitment letter tends to be the most heavily negotiated document and the primary driver of value for the sponsor. It is usually entered into by the sponsor and the insurance holding company—importantly, the insurance company itself is not a party to, or bound by, the commitment letter.
A defining feature of the commitment letter is the insurance holding company’s guarantee of a minimum management fee rate or, more commonly, a minimum fee stream, to the sponsor. While this creates economic certainty for the sponsor, it also introduces important questions around the treatment of unallocated or undeployed capital. For example, the parties must grapple with questions such as: (i) the treatment of cash; (ii) the insurance company’s obligation to transfer sufficient AUM to the sponsor to meet the minimum fee stream; and (iii) the sponsor’s efforts to deploy capital.
Another defining feature of the commitment letter is duration of the arrangement. Typically, the insurance holding company will agree not to permit an insurance company subsidiary to terminate an IMA with the sponsor during a fixed term, generally ranging from five to 10 years (with potential for automatic renewals). Termination may be permitted during the term “for cause,” e.g., material, uncured breach of the IMA or material, uncured underperformance by the sponsor. The menu of termination rights is highly negotiated, with the definition of material underperformance often being especially fraught. If termination occurs during the fixed term but outside the limited menu of termination rights, the sponsor is generally entitled to damages, which may be based on the expected fee stream over the fixed term.
The commitment letter may include other highly negotiated terms as well. For example, the sponsor may request exclusivity over select asset classes to obtain assurances regarding the level and growth of AUM for those classes; the insurer is likely to resist, as this could create dependence on the sponsor and potentially subject the insurer to non-market fees. On the flip side, the insurer
may request that the sponsor not enter into similar arrangements with the insurer’s competitors to obtain comfort over the quantity and quality of investment opportunities. The sponsor will naturally resist granting exclusivity that will limit its own growth opportunities.
An insurance company client is also likely to request most-favored-nation (MFN) protections. Sponsors are often willing to grant standard MFN protections over commingled funds, but the MFN negotiations become more complicated—and contentious—if an insurer requests an MFN over IMAs or separately managed accounts. A sponsor will need to think carefully about ripple effects across its businesses if it agrees to such an MFN.
Finally, the approach to conflicts is another area where the sponsor’s ordinary course practices and the insurance company’s relatively conservative expectations may differ.
IMAs: Plain Vanilla but Not Necessarily Simple
The IMA executed at the insurance company level is primarily an operational document and should include “plain vanilla” terms customary for insurance clients, including in respect of fees and termination rights. Nonetheless, several provisions are likely to be highly negotiated, including the following:
(i) Expenses. Sponsors typically seek broad reimbursement rights, in part to align with practices for non-insurance clients. However, insurance companies will expect to conduct diligence on expenses, and there may be significant pushback from the insurer—including, at the most extreme end, a request that fee rates be “all in.”
(ii) Investment Guidelines. The investment guidelines will be largely based on the insurance company’s regulatory requirements. Insurance companies often expect their asset managers to have a degree of familiarity with applicable insurance law, so there may be negotiation over each party’s responsibility for monitoring and updating the investment guidelines to ensure compliance with law.
(iii) Flexibility vs. Certainty. Another point of tension is that sponsors typically require visibility into committed capital for pipeline planning, while insurers will typically seek to retain flexibility to adjust allocations across entities and asset classes to satisfy regulatory requirements and react to changes in insurance liabilities.
It is also worth noting that insurance companies may have specific structural needs for their investments due to statutory accounting rules, risk-based capital treatment, concentration limits, Schedule Y affiliate treatment and other insurance-law constraints. Insurers expect their asset managers to work with them to address their needs, but this introduces additional costs and operational complexity for the sponsor. This may also form part of IMA negotiations.
Operational Readiness: A Potential Trap
After the documentation is finalized, there may still be significant work needed to operationalize the relationship prior to the effective date. Accordingly, the parties must allow sufficient lead time between signing of the definitive agreements and effectiveness of the relationship.
Reporting requirements, in particular, can present a challenge. For example, the sponsor will likely covenant to produce reports that the insurer can use for its statutory accounting and other regulatory purposes—in many cases, this reporting is developed specifically for insurance clients. The sponsor will also be required to track compliance with the investment guidelines, which may be across multiple insurance company affiliates, and to track investment performance based on heavily negotiated tests. And from a technical perspective, the sponsor must ensure that its IT systems are able to interface with the insurance company’s systems in delivering reports. Other operational challenges may include valuation of assets and monitoring across the sponsor’s businesses for potential MFN triggers (to the extent an MFN is granted).
Because of the operational complexity in serving insurance company clients, these investment management relationships tend to be “high touch” in nature, with continuous communication between the sponsor and the insurance client for the duration of the arrangement.
Conclusion
From a sponsor’s perspective, strategic relationships with insurance companies offer compelling opportunities to access permanent capital and source relatively illiquid investments. However, care must be taken to structure the transaction in a way that accomplishes the sponsor’s economic goals, does not create undue regulatory risk to the sponsor, and satisfies the insurance company’s regulatory requirements. Successfully navigating the journey from proposal to an operational arrangement requires careful management of regulatory considerations from the start, thoughtful alignment of the parties’ incentives, clear allocation of risk in the contracts, and robust operational planning to support bespoke mandates.
Private Equity Report Spring 2026, Vol 26, No 1