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PE firms bullish on lift from insurance asset management strategies

Certain large alternative asset managers have broadened and deepened their focus on insurance asset management, as the combination of low interest rates and traditional companies' desire to shed legacy liabilities have coalesced.

During separate appearances at a recent investor conference, executives at Carlyle Group LP, Apollo Global Management Inc. and Ares Management Corp. outlined strategies for expanding their roles in the insurance realm that have different entry points and executions but share some common roots.

Carlyle Co-CEO Kewsong Lee spoke at the conference two weeks after his firm announced that it would increase its stake to a majority position in a reinsurer established to manage legacy liabilities of American International Group Inc. He presented the deal's target, Fortitude Reinsurance Co. Ltd., as a growth platform that can be used as a consolidator of the "bajillion" dollars worth of legacy liabilities that current holders are seeking to shed.

"This has nothing to do with Carlyle wanting to be an insurance company, but it has everything to do with Carlyle extending our ... core business of investment management and ... providing that service into the insurance sector, which [has] trillions of dollars of assets that I believe could be managed in the alternative space for the betterment of insurance companies," Lee said.

As Fortitude expands, he added, "It's not like our expense base goes up materially to manage these assets. I already have all the investment teams in place, all the fund strategies in place. Credit segments already exist. Private equity business already exists."

Lee contrasted Carlyle's approach to the insurance space with that of peers that operate more of a "B2C"-type model where balance sheet growth is fueled by the production of annuities, in turn creating "a variable that I'm not so sure I love."

Apollo's Athene Holding Ltd. has been a trailblazer in that regard through the 2010s, and Apollo Chairman and CEO Leon Black said the $3 billion in funds raised for the Apollo/Athene Dedicated Investment Program gives the insurer additional firepower to execute its strategy.

Black believes the Federal Reserve's current interest rate strategy will result in "a lot of opportunity to buy more insurance assets" given the challenges faced by existing owners in creating spread.

"Our whole strategy is to be able not to invest in lower credits, but to take on credits that may be a little more complex and less liquid and get an extra 50, 60, 70 basis points," Black said. "And when you can lever 10-to-1, that's an extra 500, 600 basis points more of return, and that's a kind of a secret sauce that we will continue to use."

Black sized the market for insurance assets potentially for sale at upward of $1.5 trillion and said Apollo is "scaling" up to take advantage of the associated opportunity.

Ares is the most recent of the three to move into insurance company ownership through a July agreement to acquire a Global Bankers Insurance Group LLC subsidiary out of rehabilitation. But President and CEO Michael Arougheti said his company has been managing money on behalf of insurers since its founding, with insurance company funds currently accounting for about 15% of its assets under management.

Arougheti said the deal represents the culmination of five years' worth of efforts to move into life insurer ownership, as Ares reviewed upward of 60 potential acquisitions in the sector during that time.

"And either because price didn't work, people didn't work, the portfolio didn't work," he said, "there was something about it that prohibited us from making that acquisition."

The current target, Pavonia Life Insurance Co. of Michigan, is relatively small, with $64.1 million in capital and surplus as of Sept. 30. But Arougheti said the company is "quite meaningful" in terms of its distribution capabilities.

"We're very excited about that because it was really the missing piece for us," he said. "But now that we actually have the annuities, origination and distribution, coupled with a new reinsurance platform, we think we now have the complete capability set."

From an investment strategy standpoint, Ares' focus on insurance company assets has led to it getting "deeper and deeper" into creating products "well-suited" for their consumption, Arougheti said. He mentioned the firm's work in establishing insurance dedicated funds and joint ventures in asset-backed securities and private credit.

Arougheti said Ares' ownership of an insurer will provide it with greater visibility and proximity from an asset management standpoint relative to a comparable relationship with a third party.

"I've always thought of it in some ways just as another retail distribution of alternatives," he said. "We're effectively taking our alternative product, repackaging it in the form of an annuity, and selling it to a retail consumer."