Investing in insurance companies makes more sense for large alternative asset managers than it ever has.
Most recently, KKR and CDPQ purchased USI Insurance Services, an American insurance brokerage and consulting firm, for a reported $2 billion. KKR acquired the company with capital from its balance sheet as opposed to a fund it manages.
KKR's competitors have also taken full advantage of the insurance business and the access to permanent capital it offers them.
Apollo created annuity company Athene in 2009, retaining a significant stake when the insurance company went public last year. Blackstone partnered with Axis Capital to create Harrington Re, a multi-line reinsurance company.
The relationship between private equity and insurance companies is an old one. Private equity firms have acquired insurance companies for years with the goal of boosting returns. Large insurance companies have also been regular limited partners in private equity funds.
Since some of the largest multi-asset managers have gone public, they have not only expanded their strategies but also looked at private investments with a longer horizon. This is where owning an insurance company makes a lot of sense.
Typically, these insurance companies invest a significant portion of their capital in private capital vehicles managed by fund advisors in addition to more traditional fixed income instruments to boost returns. By owning an insurance business, private fund managers now have ready access to quasi-permanent capital with the added bonus of earning management fees and carry from those relationships.
“It's attractive because of the premium that insurance companies get, and those are long-dated capital commitments for the most part that they can deploy into alternative investments,” says Meghan Neenan, a managing director at Fitch Ratings.
“A lot of these guys are after the insurance companies for the same reasons, and that is the opportunity to sub-advise on some of the cash that they invest. The alternative managers look at it as dry powder that's theirs for the taking, in a way.”
Blackstone said during its second-quarter call last year that Harrington would commit to funds managed by its credit arm GSO Capital Partners. Athene has invested in Apollo's credit and real estate strategies.
Neenan explains that the industry has seen the success Apollo has had with Athene and said she wouldn't be surprised if these relationships continued to crop up.
“Alternative managers at large have been increasingly interested in tapping the insurance market in any way, shape or form that they can,” she says. “It's an opportunity for them to provide enhanced returns to the insurance company, and to get more access to capital.”
While the insurance industry will continue to see more involvement from private asset managers, it's those with the most diverse product offerings who stand to benefit.