Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Analysis: Chasing yield, U.S. private equity firms nudge up risk on insurers

Stock MarketsJun 01, 2021 10:15AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: A Wall Street sign is pictured outside the New York Stock Exchange amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, U.S., April 16, 2021. REUTERS/Carlo Allegri/File Photo

By Alwyn Scott

NEW YORK (Reuters) - Private equity firms have spent nearly $40 billion buying U.S. 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% of all U.S. 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%.


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 (NASDAQ:CG) 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 (NYSE:AIG) last year.

Apollo Global Management (NYSE:APO) Inc runs all $186 billion in assets of annuity provider Athene Holding (NYSE:ATH) Ltd, a portfolio that accounts for 40% of Apollo's total managed assets and 30% of the firm's fee-related revenue.

Apollo says buying the 65% 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% of the portfolio.

Athene loaned $2 billion to bankrupt rental-car company Hertz Global Holdings (OTC:HTZGQ) 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% investment grade and 15% speculative, or junk, grade. The loan earns an interest rate of 3.75%, 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%, these people said. That compares with 3.2% for investment-grade and 4.8% 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.

The Middle Eastern real estate provides a revenue stream for 24 years, after which ownership reverts to ADNOC, which kept a 51% stake. Reuters could not determine the return, but brokers said occupancy has been falling from relatively high levels.

ADNOC declined to comment.


The build up of difficult-to-sell investments has drawn attention from U.S. regulators and raised concerns that insurers may lack cash to pay a surge of claims in a crisis. The Federal Reserve recently flagged this as a concern.

"What the Fed is concerned about is that these risky assets may not be liquid enough, or they may go down in value sufficiently to endanger policyholders," said Joshua Ronen, an accounting professor at New York University whose research focuses on capital markets and financial statements.

The Fed declined to comment.

Insurers still appear well-capitalized despite the past year's economic upheaval. While the pandemic hit industry profits, it did not weaken capital, analysts said.

Athene's credit rating, for example, was upgraded this month to "A+" with a positive outlook by S&P Global (NYSE:SPGI) Ratings. About 7% of Athene's investments are rated speculative, compared with 6% for all insurers, according to S&P Global Ratings.

Still, concern about risk has affected some deals. When Allstate Corp (NYSE:ALL) went to sell its life and annuity business recently, it looked for firms not aggressively redeploying assets to riskier investments, Chief Executive Officer Tom Wilson told Reuters.

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

"There are some people out there who take these assets, they assume the insurance regulators won't pay that much attention to them. And they swing for the fences. We chose not to even talk to people like that," Wilson said. "We want our customers to be paid, even though they're not our customers anymore."

Analysis: Chasing yield, U.S. private equity firms nudge up risk on insurers

Related Articles

GameStop to rebrand EB Games in Canada by year-end
GameStop to rebrand EB Games in Canada by year-end By Reuters - Jul 28, 2021

(Reuters) - GameStop Corp (NYSE:GME) said on Wednesday that Canadian stores of its subsidiary EB Games will assume the videogame retailer's brand and name by the end of the...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email