© Reuters. FILE PHOTO: A sign on Wall Street 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
By Alwyn Scott
NEW YORK (Reuters) – Private equity firms have spent nearly $ 40 billion buying US insurance companies over the past few years, pledging to generate higher returns on the mountains of money insurers will draw from theirs in years or decades Policyholders pay.
Companies are shifting some of the money from traditional low-income investments like government bonds to riskier, harder-to-sell assets like personal loans and equity.
The postponement has caught regulators’ attention and raised concerns about a liquidity crisis if asset managers had to rush to liquidate large portfolios to meet insurance claims.
PE insurance marriages can be a joy: asset managers have skills and access to investments that insurers lack, and insurers offer cheap finance. PE firms also earn sizeable fees, although their investments do not always generate excessive returns.
But PE firms increase the risk of having a large cash pool. They now own 7.4% of all US life and pension assets, or $ 376 billion, double what it was in 2015, said credit agency AM Best. Pending deals could add $ 250 billion this year, which is PE’s ownership interest would increase to 12%.
The higher-yielding investments don’t necessarily increase the risk of default, but tend to lose more money when they default compared to plain vanilla portfolios, said a senior structured finance expert who works closely with state insurance regulators.
LIQUID, STRUCTURING RISK
Strategies are very different. Carlyle group (NASDAQ 🙂 Inc said it has invested the approximately $ 5 billion in insurance funds it manages in buyout funds, loans, and alternative investments. The money is part of the Fortitude Group’s $ 43.7 billion portfolio. Carlyle acquired a majority stake in Fortitude from American International Group Inc (NYSE 🙂 last year.
Apollo Global Management (NYSE 🙂 Inc manages all of the $ 186 billion in assets of annuity provider Athene Holding (NYSE 🙂 Ltd, a portfolio that represents 40% of Apollo’s total assets under management and 30% of the company’s fee-related income.
Apollo says buying the 65% of Athene that it doesn’t already own will make both companies the best policyholder-focused companies in the industry. The purchase also shows Apollo’s commitment to safe investments as Apollo’s shareholders are exposed to additional risk. None of Athene’s funds are in Apollo’s flagship private equity funds.
“Insurance companies are ideally positioned to take some liquidity and structuring risk,” Marc Rowan, Apollo’s chief executive officer, told Reuters. “Excess return (is achieved) by accepting less liquid securities rather than taking credit risk.”
The recent deals, which Athene calls “high grade alpha,” provide insight into Apollo’s strategy of aiming 100 to 200 basis points above similarly rated public securities in approximately 15% of the portfolio.
Athene loaned $ 2 billion to bankrupt car rental company Hertz Global Holdings (OTC 🙂 Inc in November and $ 1.4 billion to Abu Dhabi National Oil Company (ADNOC), backed by office and residential buildings in September .
Athene’s Hertz loan has an investment grade rating of 85% and a speculative rating of 15%. The loan bears an interest rate of 3.75%, according to credit documents verified by Reuters and two people familiar with the matter.
The fees Athene earned for structuring the loan increase Athene’s return to over 4.75%, these people said. This compares to 3.2% for investment grade and 4.8% for speculative bonds when the loan was granted, according to a bond index and Federal Reserve data. Hertz plans to end the bankruptcy in a deal that includes Apollo.
The Middle East real estate will provide a source of income for 24 years, after which time ownership will be returned to ADNOC, which retained a 51% stake. Reuters couldn’t determine the yield, but the brokers said occupancy has decreased from relatively high levels.
ADNOC declined to comment.
OBSERVE THE CONTROLLER
The accumulation of hard-to-sell assets has caught the attention of US regulators, raising concerns that insurers may not have enough liquidity to pay a deluge of claims during a crisis. The Federal Reserve recently identified this as a concern.
“What the Fed fears is that these risky assets may not be sufficiently liquid or fall in value enough to put policyholders at risk,” said Joshua Ronen, professor of accounting at New York University, whose research focuses on capital markets and policyholders Finance focused statements.
The Fed declined to comment.
Despite the economic upheavals of the past year, insurers still appear to be well capitalized. While the pandemic hurt industry profits, it did not weaken capital, analysts said.
Athenes credit rating, for example, was upgraded this month by S&P Global (NYSE 🙂 Ratings to “A +” with a positive outlook. According to S&P Global Ratings, around 7% of Athene’s investments are classified as speculative, compared to 6% for all insurers.
However, concerns about risk have impacted some businesses. When Allstate Corp (NYSE 🙂 recently sold its life and annuity business, it was looking for companies that weren’t aggressively switching assets into riskier investments, Chief Executive Officer Tom Wilson told Reuters.
In January, Allstate agreed to sell 80% to Blackstone Group (NYSE 🙂 Inc and the rest to Wilton Re, an insurer owned by the Canada Pension Plan Investment Board. Both sales are expected to be completed this year.
“There are some people out there who are taking these assets, they assume that insurance regulators won’t pay them as much attention. And they are swinging around the fences. We decided not even to speak to people like that.” said Wilson. “We want our customers to be paid even though they are no longer our customers.”