Analysis: In search of yield, US private equity firms increase risk for insurers

A Wall Street sign is pictured outside the New York Stock Exchange amid the coronavirus disease (COVID-19) pandemic in the Manhattan neighborhood of New York City, New York, the United States on April 16 2021. REUTERS / Carlo Allegri / File Photo

Private equity firms have spent nearly $ 40 billion buying American insurance companies in recent years, promising to generate higher returns on the mountains of money insurers have set aside to pay policyholders in years or decades.

Companies are shifting some of the money from traditional low-yielding investments like government bonds to riskier, harder-to-sell assets like private loans and stocks.

The change caught the attention of regulators and raised concerns about a cash flow squeeze if asset managers were to hurriedly liquidate large portfolios to deal with insurance claims.

PE insurance marriages can be joyful: asset managers have skills and access to investments that insurers lack, and insurers provide cheap finance. PE firms also charge significant fees, although their investments do not always generate disproportionate returns.

But private equity firms increase the risk on a great deal of money. They now hold 7.4% of all U.S. life and annuity assets, or $ 376 billion, or double the 2015 total, credit agency AM Best said. Ongoing deals could add $ 250 billion this year, bringing PE ownership to 12%.

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High-yield investments don’t necessarily increase default risk, but tend to lose more money in default, compared to simple portfolios, said senior structured finance expert who works closely. with state insurance regulators.


The strategies vary widely. Carlyle Group Inc (CG.O) said it has invested the roughly $ 5 billion in insurance it manages in buyout funds, loans and alternative investments. The silver is part of Fortitude Group’s $ 43.7 billion portfolio (FRTD.PK). Carlyle bought a controlling stake in Fortitude from American International Group Inc (AIG.N) last year.

Apollo Global Management Inc (APO.N) manages all of the $ 186 billion in assets of annuity provider Athene Holding Ltd (ATH.N), a portfolio that represents 40% of Apollo’s total assets under management and 30% income related to company fees.

Apollo says buying the 65% Athene it doesn’t already own will make the two companies the most “aligned” with policyholders in the industry. The purchase also shows Apollo’s commitment to safe investments, as Apollo shareholders are exposed to any additional risk. No Athene money is in Apollo’s flagship private equity funds.

“Insurance companies are ideally placed to take a certain amount of liquidity and structuring risk,” Apollo CEO Marc Rowan told Reuters. “Excess return (is obtained) by accepting less liquid securities rather than taking credit risk.”

Recent trades that Athene calls “high quality alpha” provide a window into Apollo’s strategy of seeking 100-200 basis points above similarly rated government securities on around 15% of the portfolio.

Athene loaned $ 2 billion to bankrupt car rental company Hertz Global Holdings Inc (HTZGQ.PK) in November, and $ 1.4 billion to Abu Dhabi National Oil Company (ADNOC), guaranteed by office and apartment buildings in September.

Athene’s Hertz loan is 85% investment grade and 15% speculative or junk grade. The loan pays an interest rate of 3.75%, according to loan documents reviewed by Reuters and two people familiar with the matter.

The fees Athene collects for structuring the loan raises Athene’s return above 4.75%, the people said. This compares to 3.2% for good-quality debt and 4.8% for speculative debt at the time of the loan, according to a bond index and Federal Reserve data. Hertz plans to come out of bankruptcy under a deal that includes Apollo.

Real estate in the Middle East provides a source of income for 24 years, after which ownership reverts to ADNOC, which retained a 51% stake. Reuters could not determine the return, but brokers said the occupancy rate was down from relatively high levels.

ADNOC declined to comment.


The build-up of hard-to-sell investments has caught the attention of US regulators and raised concerns that insurers have cash to pay for a surge in claims in a crisis. The Federal Reserve recently flagged this as a concern.

“What worries the Fed is that these risky assets may not be liquid enough, or they may lose value enough to put policyholders at risk,” said Joshua Ronen, professor of accounting at New University. York whose research focuses on financial markets and finance. statements.

The Fed declined to comment.

Insurers still appear to be well capitalized despite the economic upheaval of the past year. While the pandemic has hit industry profits, it has not weakened capital, analysts said.

Athene’s credit rating, for example, was upgraded this month to “A +” with a positive outlook from S&P Global Ratings. About 7% of Athene’s investments are rated speculative, compared to 6% for all insurers, according to S&P Global Ratings.

Yet concerns about risk affected some transactions. When Allstate Corp (ALL.N) recently sold its life insurance and annuity business, it looked for companies that were not aggressively redeploying their assets to riskier investments, CEO Tom Wilson told Reuters.

In January, Allstate agreed to sell 80% to Blackstone Group Inc (BX.N) and the remainder to Wilton Re, an insurer owned by the Canada Pension Plan Investment Board. Both sales are expected to close this year.

“There are people who take these assets, they assume insurance regulators won’t pay them as much attention. And they swing towards the fences. We chose not to even talk to people like that, ”Wilson said. “We want our customers to be paid, even if they are no longer our customers.”

Our standards: Thomson Reuters Trust Principles.

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About Christopher Easley

Christopher Easley

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