Rating agency Fitch has highlighted “significant opportunity” for insurers to build their investment exposure to other asset classes through arrangements with alternative investment managers, following a recent trend of life insurers increasing allocations to alternative investments.
U.S. alternative investment managers’ (IMs) growing relationships with life insurance companies through investment advisory agreements and/or equity investments could potentially offer a win-win outcome for both partners, explained Fitch.
Alternative investors stand to benefit from recurring management fee revenue on greater fee-generating assets under management (FAUM), while increasing AUM investment by products and geography.
In turn, life insurance companies could gain from lower interest margin pressure due to earning higher yields on alternative investments while gaining access to investment expertise, particularly in private asset classes.
In addition, Fitch said, life insurers could free up capital and increase focus on higher return businesses by exiting underperforming legacy businesses including variable annuities (VA).
Alternative investment manager Apollo is a case in point, having moved into the insurance asset management space and significantly grown earnings with the 2009 launch of Athene Holding for which it manages $77 billion of assets including investing over $17 billion in Apollo’s own credit and real estate funds.
Apollo further expanded its insurance platform into Europe through Athora Holding and Venerable Holdings, a platform used to acquire Voya Insurance and Annuity Company and facilitate future annuity transactions.
Blackstone’s creation of Harrington Re in 2016 and equity investment in Fidelity & Guaranty Life through its funds in 2017 is a further example of investment managers making headway into the life insurance space.
According to Fitch, Blackstone launched Blackstone Insurance Solutions to provide full outsourced management for insurers’ investment portfolios in 2018 and the firm has revealed hopes to quadruple its insurance AUM to $100 billion in the coming years.
However, these partnerships don’t come without potential risks, Fitch explained they add to “alternative IMs’ “dry powder” deployment challenge during a period when potential investment valuations are high. This could pressure future investment performance impacting insurance companies’ returns and alternative IMs’ incentive fee income and performance track records.”
Insurers also run the risk of retaining insurance liability in cases where alternative IMs have an investment mandate, however, this could be offset when alternative IMs form new vehicles to acquire closed blocks, the newly formed vehicle, which is partially owned by the alternative IM or its funds, assumes the assets and liabilities unless the latter are ceded to a re/insurer.
Fitch added that for life insurers that receive equity investments from alternative IMs, regulators may also impose higher capital standards and enforce stricter dividend policies.
