A big money manager has come up with a way to get bigger, fast: offer insurers new types of investment vehicles that can help them survive in an age of low yields on high-rated corporate bonds.
Executives from the Blackstone Group L.P. talked about that strategy last week, during a conference call with securities analysts.
Steve Schwarzman, Blackstone’s chairman, told analysts that Blackstone managers see the world’s insurance asset-management market as a $23 trillion, largely untapped opportunity.
“We are exceptionally well-positioned to address this market, and I believe we can build the business well in excess of $100 billion in assets under management over time,” Schwarzman said.
What Your Peers Are Reading
The Chris Blunt Hire
Blackstone caught the insurance industry’s attention earlier this month, when it hired Chris Blunt, the former head of New York Life Insurance Company’s investment group, to run the Blackstone Insurance Solutions unit.
A Blackstone affiliate recently acquired Fidelity & Guaranty Life. Blackstone formed the insurance solutions unit to manage assets for Fidelity & Guaranty Life and other insurers Blackstone acquires.
Blackstone hopes the insurance solutions unit will also attract cash from outside insurers, and, possibly, to take over managing some insurers’ investment portfolios.
Life Insurers As Investors
Life insurers, in particular, face different constraints than many other big investors.
Because many of the annuities, life insurance policies and other products they offer will pay off many years in the future, and may pay streams of benefits over periods lasting for many years, life insurance company asset managers can lock away more of their money for longer periods than banks, mutual fund companies or even property-casualty insurers can.
On the other hand, because the modern U.S. life insurance industry was formed in response to the Panic of 1873, when some life insurers with speculative investments failed, life insurers face strict investment rules.
State insurance regulators use the risk-based capital system to give life insurers more credit for investments seen as safer than for investments seen as less safe.
Moody’s, Standard & Poor’s, Fitch and A.M Best also keep close tabs on life insurers’ investments.
Under current conditions, many insurers are struggling to earn high enough returns on investments to offer the kinds of annuity benefits guarantees they could offer 15 years ago, or even to support the guarantees they have already made.
Life insurers need money managers that can keep assets safe enough to please regulators and rating analysts while using life insurers’ size, and patience, to push returns beyond what big, respected companies now pay their bondholders.
For life insurers, evaluating new investment ideas under current low-yield conditions is comparable to people affected by a famine looking at wild berries: They want to try something new, but they’re afraid of new strategies will lead to new problems.
What Blackstone Executives Told the Analysts.