Private equity follows hedge funds into reinsurance for long-term capital

It’s not just hedge funds that are entering the insurance and reinsurance market in search of so-called long-term capital to put to work in their strategies, private equity firms targeting the space are also seeking opportunities to add assets under management.

The entry of large private equity investors into the insurance and reinsurance market in recent years has led to much discussion of the reasons for this move, according to this Institutional Investor article, as well as to discussion at regulator level whether it is in the industries best interests.

This discussion has been even louder in the case of private equity firms tapping low-returning business, such as the fixed annuities space, but what these firms are seeking is, much like the hedge funds, a new source of capital to boost their assets under management and to earn them fees in return for managing it.

In particular the article highlights that private equity firms have been buying life and annuity companies, with predictable lines of longer-tailed business, perfect for generating that all important float for investment purposes.

Here is where the regulators come in. Generally the regulators have a concern that private equity firms may move life and annuities insurers investable assets into riskier asset classes, in an effort to generate an outsized return.

However, data from SNL Financial shows that two of the leading proponents of this strategy, Apollo’s Athene Holding and Guggenheim Capital, have not made drastic changes to the investment portfolios of insurers they have bought, in fact any changes made to the asset mix have been in-line with the life insurance industry as a whole.

While we talk about hedge fund backed reinsurers and their more aggressive investment strategies, or traditional reinsurers seeking to boost their asset-side return by taking a more active approach to managing assets, it does not seem that private equity firms are following this approach.

It would seem that private equity firms appreciate the returns possible from the reinsurance business over the long-term, if this is indeed the case across that segment of the market. Generating long-term capital, being good stewards of that capital, building the insurance business based on acquisition of assets, is clearly an attractive strategy for these large investors.

It’s another interesting side of the insurance and reinsurance market, which sees new capital coming in and tapping the market for returns and investment float.