Private equity taps insurers’ cash to speed up growth

Private-credit fund managers such as Blackstone Inc., Carlyle 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.

Insurers have piles of cash from annuity payments and insurance premiums but many have been struggling for years to get good investment returns in bond portfolios they manage themselves. Private-equity firms have been building a financing machine that produces complex private-debt instruments but often at lower yields than their traditional clients demand. Insurers are happy to buy.

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

The deals are part of a broad transition on Wall Street as money managers replace investment banks as financial supermarkets to the world.

Insurers primarily buy investment-grade debt, and before the 2008 financial crisis they obtained ample supply from investment banks in the form of what are known as 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.

“Asset managers like us have increasingly stepped in to fill the void," said Dushyant Mehra, co-chief investment officer of Hildene, which started a reinsurance business in September.

Private debt is opaque and growing fast, something credit ratings firms and regulators have flagged as a potential danger. For example, the standards-setting National Association of Insurance Commissioners is examining risks posed by a surge in insurers’ purchases of privately structured securities.

Some firms are buying stakes in annuity companies, while others strike contracts with them to manage their assets. Some provide reinsurance, or insurance for the insurers.

Davidson Kempner just closed its largest deal ever in the insurance space. The $37 billion asset manager committed $300 million to a reinsurance venture it formed in December with Kuvare Holdings, a technology-driven insurer.

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.

If returns on the investments exceed payouts on the annuities, Kindley profits. If not, the reinsurer takes the hit.

The trend traces 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.

The potential market for investment-grade private credit could be as large as $40 trillion, according to Apollo. Such 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. Those have yielded between 2% and 5.75% annually for consumers over the past two decades.

Many traditional insurers had been shedding annuities in recent years because low interest rates made it hard for them to cover the obligations and offer competitive yields. Outsourcing the annuity businesses frees up capital for insurers—ideally boosting their stock prices.

“Insurers need other suitable investments that meet their policyholder obligations…so there’s an increased need for the capabilities we provide," said Craig Lee, head of insurance and strategic finance for KKR & Co., which bought life insurer Global Atlantic Financial Group Ltd. in 2021.

Some insurance companies have their own investment arms that are building up private-credit teams. Still, many are turning to alternative investment firms that have gotten better at creating private debt with investment-grade credit ratings.

The Federal Reserve raised interest rates sharply over the past year but bond yields remain low by historical standards. Private-credit firms now have created higher-returning debt backed by loans to investment-grade companies and equipment leases, real estate, consumer loans, junk-rated corporate loans and even shares in private-equity funds.

Apollo and KKR are now growing less through acquisitions and reinsurance and more by growing Athene’s and Global Atlantic’s pre-existing annuities businesses. That puts them in competition with their insurance clients, which in turn has opened a door for smaller fund managers to form partnerships with insurers.

“Insurance companies generally liked working with Athene and Global Atlantic but they wanted other reinsurance options," said Matt Kabaker, who oversees insurance solutions and co-heads private equity at Centerbridge.

Massachusetts Mutual Life Insurance Co. approached Centerbridge in 2021 about creating a reinsurer, and 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, about half of which is in debt investments. “With this relationship, we were able to catapult ourselves to scale in insurance solutions," Mr. Kabaker said.