Much of the conversation around the involvement of alternative asset managers in the life insurance industry in the past few years has centred around both the pension risk transfer market and the asset-intensive life reinsurance market in the US. In both cases, the investment firm enjoys the benefits that access to higher-yielding, private investments provides.
But something that somewhat preceded the recent increased appetite from asset managers looking to get a slice of the life insurance pie is their involvement in the buying and building of life insurance consolidators.
Two recent and notable transactions, however, saw brand-name asset managers exit their consolidator investments. In December last year, Blackstone sold Resolution Life to Japanese insurance giant Nippon Life. Then in mid-March, Cinven sold Viridium Group, a German life insurance consolidator, to a consortium comprising Allianz, BlackRock, T&D Holdings, Hannover Re and Generali Financial Holdings.
Is this a sign, then, of some kind of trend of alternative asset managers exiting the consolidator market? Unlikely, according to Arik Rashkes, Partner and Head of Financial Institutions at Solomon Partners.
“The nature of private equity is to make money for the limited partners and return the capital to them. They have a time horizon, and while sometimes they extend it a bit, the return of capital back to the LPs was likely the main reason these deals happened when they did.”
So, whilst the timing of these two deals is less likely to be indicative of a broader trend, that doesn’t mean that activity will ramp up going forward, either. Life insurance consolidators are large companies, necessarily; Viridium Group had approximately €67bn of assets under management, 3.4m policies and about 900 employees, according to the press release announcing the deal, and there are only so many firms that have the scale and expertise to buy and/or build these types of companies – even some alternative asset managers, who would be considered large when compared to their peers, now simply don’t have the scale to do it.
“Both the consolidator and distribution markets have been in consolidation for many years – driven primarily by a few platform investments by mega-cap funds. These two examples are two of the larger ones. These are very large assets, and they are now typically too large even for mega-cap PE to do solo,” said Robert Lytle, Senior Managing Director at global consultancy, Stax.
Those potential new entrants seeking to get a piece of the life insurance-based permanent capital action still have a few options. They can buy a life insurer, enter into a partnership with one whereby they serve as the or one of the exclusive asset managers, or partner with one in the asset intensive life reinsurance market.
Each option requires access to significant capital and intellectual resources.
“In the past decade, I’ve been getting calls almost weekly sometimes from asset managers and PE funds asking us to help them create the next Athene. Out of 100, maybe one pulled the trigger or created something from scratch. This is not an easy task; you need expertise, and you need to understand how to manage pension and insurance assets. It requires a ton of capital. The universe of those firms that can pull this off is limited,” said Rashkes.
The asset intensive life reinsurance market would appear to be the most obvious entry point. These deals are more straightforward to execute (when compared to alternative options) and, according to ratings agency AM Best, they are a growth area; the firm said in February that, overall, total ceded reserves to life and annuity sidecars increased to nearly $55bn in 2023 from approximately $17bn in 2021 and the outlook for additional activity is solid.
“The vast majority of reserves ceded are covering liabilities for indexed and fixed annuities. We expect this trend to grow much more significantly as more deals closed in 2024 and the environment continues to be conducive for annuity growth,” said Jason Hopper, Associate Director, Industry Research and Analytics at AM Best.
“Even if asset-manager sponsors maintain their commitment to the long-term nature of life/ annuity insurance business through partial or outright ownership of some companies, the sidecars to which they reinsure a small share of the business may follow a traditional private equity model.”
So, alternative asset manager involvement in the life insurance market is here to stay. And, according to Rashkes, there is good reason for the doubters to feel a little bit better about it.
“Private investing is not necessarily riskier. Because of the time horizons and the track records of the mega funds, it’s actually sensible that a professional, well-known, reputable fund will manage pensions and insurance assets,” he said.
“If you think about life insurers 20 years ago, they were largely investing in investment grade assets but then the market dipped into uncharted territory with the zero-interest rate regime. These insurers had to reinvent themselves. The involvement of alternative asset managers in the life insurance market is part of an evolution, and it’s a trend that makes sense.”