Insurers Will Stake Their Claim In Private Credit

Signs of life. Picture this: a U.S. insurance industry grown fat after a period of explosive growth began extending private loans, buying up debt churned out by wheeling and dealing financiers. That was the year 1905. It might also describe, in more measured form, the situation more than a century later. This time, expect traditional insurers to turn the tables and buy up private credit managers.

Life insurance is fundamentally simple. Take the $385 billion market for U.S. annuities. A customer buys a policy from MetLife or Prudential Financial, handing over money in return for promised income down the line. The insurer then plows the customer’s premium payments into assets that offer a return. If done well, that return exceeds the cost of future payouts. The insurer pockets this “spread.”

For traditional insurers, that seemingly simple proposition has proved far from straightforward. Rock-bottom interest rates dragged the U.S. industry’s net spread – the yield on investment portfolios above the rates guaranteed to policyholders – from 1.8% in 2007 to a nadir of 0.6% in 2020, according to the National Association of Insurance Commissioners. That, in turn, pressured the rates insurers offered to their customers, making policies less appealing: total U.S. individual annuity premiums in 2020 were lower than in 2008, S&P Global reckons. High fixed payouts on old policies were a further drag on the industry.

This created an opening for new entrants. Alternative asset managers like Apollo, Blackstone and KKR were expanding into real estate, infrastructure, direct lending and structured credit. These investments offered attractive long-term yields that neatly matched insurers’ liabilities in both duration and return while also being hard to replicate. Now-boss of Apollo Marc Rowan in 2009 helped establish the insurer Athene, which scooped up liabilities from other players and plowed the premiums into a novel mix of assets.

Apollo merged with Athene in 2022, while KKR took full control of rival Global Atlantic two years later. Private equity-backed insurers now hold 25% of U.S. individual annuity liabilities, according to Swiss Re. Athene is the nation’s leading peddler, collecting $36 billion in premiums in 2023. Investors have rejoiced. Jefferies analysts calculate that, as a part of Rowan’s empire, Athene’s implied valuation stands at about 12 times earnings, roughly double the multiple investors ascribe to $15 billion life insurer Equitable.

This situation threatens to be self-reinforcing. Athene’s net investment spread of about 2% soundly beats the industry’s sub-1% average, allowing the Apollo unit to offer juicier policies to customers. To avoid getting left behind, insurers are paying to let Apollo manage their investments. Rowan’s company has booked $100 billion in business with third-party insurers.

To regain competitiveness, traditional insurers need three things: to free up their balance sheets so they can write more business; to gather capital to support expansion; and to gain new asset management capabilities.

There’s an increasingly popular way to address the first two points. Insurers are setting up vehicles known as “sidecars”, which use capital from co-investors to reinsure some of the parent company’s liabilities, freeing up balance sheet capacity. Prudential Financial, for instance, in 2023 set up its own take on this approach by establishing independent vehicle Prismic in partnership with private equity firm Warburg Pincus.

If the insurer then also manages those assets, it can effectively convert spread income into earnings from fees, which public investors prize more highly. Prudential has an in-house investment unit, PGIM, which juggles $1 trillion in assets. Bolstered by efforts like Prismic, it’s trying to build out its abilities with a view to selling services to other insurers, too. Boss Charles Lowrey has said the company is looking for acquisitions.

Insurers’ M&A efforts have so far been piecemeal. Some – like $63 billion Aflac, which purchased a stake in private credit firm Tree Line Capital Partners in May – buy minority positions to seal partnerships and gain access to deal flow. Others – like Prudential, which acquired Deerpath Capital in 2023 – are locking up smaller managers. Guardian Life had a passive minority stake in HPS Investment Partners, a big private lender which in December sold itself to giant asset manager BlackRock for around $12 billion. Canada’s Sun Life acquired a majority stake in Crescent Capital in 2021, when the fixed income investor had around $29 billion under management.

It is time to be bolder. To flip the tables, an insurer would have to take a substantial stake in one of the bigger alternative asset managers. That would be tricky from a valuation perspective: Carlyle, which is valued at 12 times expected earnings according to Visible Alpha, has the lowest rating of the large listed private investment firms. Yet it still trades at a premium to big insurers like Prudential or MetLife.

Nevertheless, as insurance and private credit become more intertwined, insurers can either stand by as alternative asset managers eat their lunch or compete head-on. Expect some big insurers to reassert control in 2025.