By Alwyn Scott
NEW YORK- Private equity firms have spent nearly $40 billion buying US insurance companies in recent years, promising to earn higher returns on the mountains of money that insurers set aside to pay policyholders years or decades from now.
The firms are moving some of the money out of traditional low-yield investments such as government bonds into riskier, harder-to-sell assets such as private loans and equity.
The shift has caught the eye of regulators and raised concerns about a cash crunch if asset managers had to liquidate large portfolios in a hurry to meet insurance claims.
PE-insurance marriages can be joyous: Asset managers have skills and access to investments that insurers lack, and insurers provide cheap funding. PE firms also earn significant fees, even though their investments do not always capture outsized returns.
But PE firms are nudging up risk on a large pool of money. They now own 7.4 percent of all US life and annuity assets, or $376 billion, double the tally in 2015, credit agency AM Best said. Pending deals could add $250 billion this year, pushing PE ownership to 12 percent.
The higher-yielding investments do not necessarily increase the risk of default but tend to lose more money if they do default, compared with plain-vanilla portfolios, said a senior structured finance expert who works closely with state insurance regulators.
Strategies vary widely. Carlyle Group Inc said it has put the approximately $5 billion of insurance money it manages into buyout funds, credit and alternative investments. The money is part of Fortitude Group’s $43.7 billion portfolio. Carlyle bought a majority stake in Fortitude from American International Group Inc last year.
Apollo Global Management Inc runs all $186 billion in assets of annuity provider Athene Holding Ltd, a portfolio that accounts for 40 percent of Apollo’s total managed assets and 30 percent of the firm’s fee-related revenue.
Apollo says buying the 65 percent of Athene it doesn’t already own will make both companies the most “aligned” with policyholders in the industry. The purchase also shows Apollo’s commitment to safe investments, since Apollo’s shareholders are exposed to any additional risk. None of Athene’s money is in Apollo’s flagship private equity funds.
“Insurance companies are ideally situated to take a certain amount of liquidity and structuring risk,” Apollo Chief Executive Officer Marc Rowan told Reuters. “Excess return (is earned) through accepting less liquid securities rather than taking on credit risk.”
Recent deals that Athene calls “high-grade alpha” provide a window into Apollo’s strategy of seeking 100 to 200 basis points above similarly rated public securities on about 15 percent of the portfolio.
Athene loaned $2 billion to bankrupt rental-car company Hertz Global Holdings Inc in November, and $1.4 billion to the Abu Dhabi National Oil Company (ADNOC), secured by office and apartment buildings in September.
Athene’s Hertz loan is 85 percent investment grade and 15 percent speculative, or junk, grade. The loan earns an interest rate of 3.75 percent, according to loan documents reviewed by Reuters and two people familiar with the matter.
Fees that Athene earned for structuring the loan boost Athene’s yield above 4.75 percent, these people said. That compares with 3.2 percent for investment-grade and 4.8 percent for speculative debt when the loan was made, according to a bond index and Federal Reserve data. Hertz plans to exit bankruptcy in a deal that includes Apollo. – Reuters
