Insurers’ Big Bet On Alternative Investments
Faced with low yields, insurers are deepening ties with private equity and asset managers, turning to alternative investments amid regulatory headwinds.
Life insurance companies used to be conservative investors.
For decades, they relied on long-term bonds—safe, steady, and predictable—to match their policy obligations. But as interest rates plunged following the 2008 financial crisis, traditional investment models no longer delivered sufficient returns.
Now insurers are embracing alternative investments like private debt, infrastructure, and real estate—often partnering with asset managers and private equity firms to boost yields. This shift is transforming the industry, raising both profit opportunities and regulatory concerns as insurers take on riskier, harder-to-value assets to increase investment returns.
“With interest rates way down after the Great Financial Crisis, the cost of insurers’ pre-2008 liabilities were still high,” says Ramnath Balasubramanian, global co-leader of the life insurance and retirement industry practice at McKinsey & Company. “Insurers needed to find ways to de-risk their balance sheets and deploy capital more efficiently.”
Slowly but surely, they are finding ways. The solution for most insurance companies has been twofold: Sell off swaths of high-cost legacy obligations to reinsurers to free up capital, and invest more of their premiums into alternative assets: most notably private debt with higher yields and risks than investment-grade bonds. Insurance companies across global markets have been building, buying, and partnering their way to better investment returns for the past decade.
Private Equity Pushes Change
Private equity firms in the US have been a major catalyst to transformation in the insurance industry globally. Big firms like Apollo Global Management, Brookfield Reinsurance, and KKR have launched or bought insurance companies since the financial crisis; others, like Blackstone and Carlyle, have taken minority stakes in other insurers.
The operating model is straightforward: Buy legacy books of insurance liabilities and reinvest the underlying assets into higher-yielding investments. Since the financial crisis, private equity firms have completed over $900 billion in transactions acquiring insurance liabilities worldwide, according to McKinsey research. They now have a 13% share of the US insurance market—up from 1% in 2012—and account for 35% of new sales of US fixed and fixed-index annuities, the consultancy reports.
“The search for yield was the motivation,” says Meghan Neenan, a managing director at Fitch Ratings, who provides ratings for asset managers. “The success they’ve had in terms of returns has been significant, and the migration in insurance portfolio profiles is still ongoing.”
Investing more in private markets and alternative assets arguably heightens insurance companies’ diversification, but it also increases risks. “Their investment portfolios are generally less liquid,” notes Neenan. Insurers’ demand for private loans—most of which have floating interest rates—has continued to grow as rates have risen.
“Ultimately, it depends on what the investor is looking for,” explains Neenan. “If [an insurance company] is underfunded and needs higher returns that they can’t get solely in the public markets, they could toggle alternative assets higher to meet that return hurdle.”
The migration of insurance portfolios toward alternative investments is now happening across global markets. Some insurers have built out investment-sourcing capabilities themselves, others have partnered with asset managers to provide those capabilities, and still others have handed off their asset management to third parties entirely. “There is a wide spectrum of models in the marketplace now,” says Balasubramanian. “The choices insurers make depend on their starting position.”
French multinational insurer AXA decided it was better off getting out of the asset management business. In December, the group sold AXA Investment Managers to BNP Paribas for €5.1 billion (about $5.5 billion) to manage its assets going forward.
Italian insurance giant Generali, on the other hand, is growing its asset management operations. The company has made several major acquisitions recently, including a deal to buy investment manager Conning from Cathay Life Insurance last year. Generali also paid $320 million for a 77% stake in MGG Investment Group earlier this year. The US firm is focused on direct lending to mid-market companies. Like a growing number of insurers, Generali is building out its own direct-lending platform.
In January, Generali announced a transformational deal, agreeing to merge its asset management operations with Natixis Investment Managers, owned by Groupe BPCE. The 50/50 joint venture will manage €1.9 trillion in assets, making it the ninth largest asset manager globally.
“The new entity would be ideally positioned to further expand its activities for third-party clients,” the insurer said in a January statement, “also thanks to Generali’s commitment to contribute a total of €15 billion in so-called seed money over the first five years to launch new initiatives and investment strategies in the alternative investments sector (particularly in private markets).”
As the private debt markets evolve into new areas like asset-based lending and equipment leasing, large asset managers will increasingly be leading the way. The big transactions recently between insurers and asset managers in Europe are only the most obvious sign of industry consolidation and restructuring. Smaller deals to reinsure liability risks and expand insurance investment platforms are happening across global markets.
Japan Leads Asia’s Growing Market
Asia is the next frontier, particularly Japan, which has about $3 trillion in life and annuity reserves in force, according to the Society of Actuaries (SOA). To date, most of the activity there has been on the liability side of insurance company balance sheets as Japanese insurers become more comfortable with block reinsurance transactions. Notable recent deals include the reinsurance by KKR-owned Global Atlantic of a nearly $4 billion block of Manulife Japan whole life policies, and a ¥700 billion (about US$4.7 billion) block of Japan Post Insurance annuities by Reinsurance Group of America.
The SOA estimates that as much as $900 billion in Japanese insurance obligations could be reinsured in the coming years thanks to new regulations mandating higher capital reserves that come into effect this year.
The global insurance industry is still on a path of transformation. “I think we’re somewhere in the middle innings of this evolution,” says McKinsey’s Balasubramanian. “Many insurers are still determining whether they will build, buy, or partner for new investment capabilities, and the deals are now happening in both directions.”
Regulators Track Risking Risk
All the activity is making insurance regulators’ jobs much harder. The assets backing insurance obligations have become more opaque and more difficult to value as companies have expanded their investment landscapes. The National Association of Insurance Commissioners (NAIC) in the US launched a task force in February to establish principles for updating risk-based capital solvency formulas for the industry.
“The extended low interest rate period that followed the Great Financial Crisis created an industry trend to search for yield in investment portfolios, resulting in a major shift in the complexity of insurers’ investment strategies, resulting in more liquidity risk than historically seen,” said Wisconsin Insurance Commissioner Nathan Houdek, a task force co-chair, in an NAIC statement.
The Bank of England, within which the financial services regulator Prudential Regulation Authority operates, warned in its Financial Stability Report last year of growing risks at insurance companies owned by private equity and in the broader industry due to the shift toward private-debt investments. “This business model, while promising benefits, has the potential to increase the fragility of parts of the global insurance sector and to pose systemic risks if vulnerabilities are not addressed,” The Bank stated.
For now, insurers see the opportunities in alternative investments as worth the risks. Insurance companies and asset managers are increasingly in competition to build better investment platforms, but they also make natural partners. The former generate lots of cash while the latter focus on getting better investment returns in public and private markets.
“The deals will continue because they’re beneficial for both parties,” says Neenan. “Insurers with long-term investment horizons get higher yields for patient investing, and alternatives managers collect fees on the assets.”
A match made in heaven … for the time being.
