Private Equity Firms Use Insurers' Cash to Fuel Growth

Investment firms that want to stay ahead of the curve are turning to insurance companies to help them grow. Insurance is one of the oldest businesses on Wall Street, and it can provide a major boost to any firm that wants to tap into it.

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Private-credit fund managers such as Blackstone Inc. have been increasingly popular in recent years. These types of funds offer investors a way to get exposure to the credit markets without having to invest directly in bonds or other debt instruments. Carlyle Group LP (CG) shares fell 0.76% in premarket trading on Thursday after the company announced it would sell its majority stake in software company Alteryx Inc (AYX) for $1.15 billion.

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Group Inc. and Centerbridge Partners are increasingly forming partnerships with insurers, or buying them outright. Call it the merger of slow money and fast money. These companies are looking to take advantage of the growing insurance market, and they are willing to invest the necessary resources to make it happen.
Insurers have been struggling for years to get good investment returns on the bond portfolios they manage themselves. Private-equity firms have been building a financing machine that produces complex private-debt instruments, but these often come with lower yields than what traditional clients demand. Insurers are happy to buy these instruments anyway.

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In the past year, large fund managers such as Blackstone, Carlyle and Sixth Street Partners have announced deals with insurers that have boosted their collective assets under management by about $80 billion. Midsize firms such as Centerbridge, Davidson Kempner Capital Management and Hildene Capital Management have also started insurance ventures.

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As part of a broad transition on Wall Street, money managers are increasingly replacing investment banks as financial supermarkets to the world. This shift is reflected in the recent deals mentioned above. Insurers typically invest in high-quality debt, and before the 2008 financial crisis they obtained ample supply from investment banks in the form of private-placement bonds. Now that middleman has largely vanished and asset managers are taking over, buying bundles of corporate, consumer and mortgage loans and packaging them into highly rated debt.

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"As traditional sources of reinsurance have become less available, asset managers like us have stepped in to fill the void," said Dushyant Mehra, co-chief investment officer of Hildene.

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Private debt is becoming increasingly opaque and growing at a rapid pace, something that credit ratings firms and regulators have flagged as a potential danger. For example, the standards-setting National Association of Insurance Commissioners is examining the risks posed by a surge in insurers’ purchases of privately structured securities. Some firms are investing in annuity companies by buying stakes in them, while others are entering into contracts with them to manage their assets. Some firms also provide reinsurance, or insurance for the insurers.

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Davidson Kempner has just closed its largest deal to date in the insurance industry. The $37 billion asset manager committed $300 million to a reinsurance venture it formed in December with Kuvare Holdings, an insurer that focuses on technology. The new company, called Kindley Re, will initially reinsure about $4 billion of annuities and similar products Kuvare sells to individuals and institutions. Kindley will be on the hook for future payments to annuity customers, freeing up capital for Kuvare. Davidson Kempner will invest some of the money that Kuvare collects on the annuities and make a management fee.

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If the return on the investment is greater than the payout on the annuity, Kindley will profit. If not, the reinsurer will take the loss.
This trend can be traced back to Apollo Global Management Inc., which helped launch annuity insurer Athene Holding Ltd. more than a decade ago. The two companies merged last year, and the Athene subsidiary now accounts for almost half of the $523 billion Apollo manages.

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According to Apollo, the potential market for investment-grade private credit could be as large as $40 trillion. This type of debt typically yields 5% to 6%, but investors in the firms' private-equity and hedge funds expect returns above 10%. Millions of conservative savers buy fixed annuities, which have yielded between 2% and 5.75% annually for consumers over the past two decades.

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Many traditional insurers have been shedding their annuity businesses in recent years due to low interest rates, which make it difficult to cover obligations and offer competitive yields. Outsourcing the annuity businesses frees up capital for insurers, which could potentially boost their stock prices. "As insurers look for other suitable investments to meet their policyholder obligations, there is an increased need for the capabilities we provide," said Craig Lee, head of insurance and strategic finance for KKR & Co. Lee made the comments after KKR's purchase of life insurer Global Atlantic Financial Group Ltd. in 2021.

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Some insurance companies have their own investment arms that are building up private-credit teams. However, many are turning to alternative investment firms that have gotten better at creating private debt with investment-grade credit ratings. The Federal Reserve has raised interest rates significantly over the past year, but bond yields remain relatively low by historical standards. Private-credit firms have responded by creating higher-return debt instruments backed by loans to investment-grade companies, equipment leases, real estate, consumer loans, junk-rated corporate loans, and even shares in private-equity funds.

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Apollo and KKR are now focusing less on acquisitions and reinsurance, and more on growing Athene's and Global Atlantic's pre-existing annuities businesses. This puts them in competition with their insurance clients, which in turn has opened a door for smaller fund managers to form partnerships with insurers.
According to Matt Kabaker, who oversees insurance solutions and co-heads private equity at Centerbridge, insurance companies generally liked working with Athene and Global Atlantic but they wanted other reinsurance options.

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In 2021, Massachusetts Mutual Life Insurance Co. approached Centerbridge about creating a reinsurer. Last year, the companies launched Martello Re with a group of co-investors. Centerbridge and MassMutual's investment subsidiary, Barings, now manage about $16 billion of assets from reinsurance contracts.
Centerbridge manages a total of roughly $35 billion, with approximately half of that invested in debt. According to Mr. Kabaker, this relationship has allowed them to scale up their insurance solutions.