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.
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.
Here are three highlights from Blackstone executives’ remarks to the securities analysts, drawn from a recording of the conference call posted on Blackstone’s website.
1. Blackstone executives see real estate as a good basis for creating insurer-friendly “alternative investments.”
In the insurance world, the restrictive regulatory environment “discourages higher-return products even if they’re safe,” Schwarzman said.
Blackstone has created private, real estate-based products for its own funds, and it believes it can create similar products that will suit insurers’ requirements, according to Michael Chae, Blackstone’s chief financial officer.
Offering private investments, rather than publicly traded investments, is a big deal, because issuers can use the savings from offering an investment on a private basis to increase the yields for the private investors, Chae said.
2. Blackstone believes it has more ability to originate the kinds of business used in private alternative investment vehicles than typical insurers do.
Some insurers are famous for making their own commercial real estate loans, or even their own residential mortgage loans.
“For the most part,” Chae said, “insurance companies do not have their own origination.”
3. Blackstone could get some of the new insurance assets by simply buying the issuers.
“We are in the business of continuing to acquire insurance companies and closed blocks,” Schwarzman said.
4. Blackstone sees the insurance market as a “chunky” market.
Schwarzman noted that, in the insurance asset management market, one client could bring in a $25 billion chunk of assets.
The chunkiness of the insurance market “should lead to much more growth, logically, in that area,” Schwarzman said.
5. Blackstone wants to stay away from managing insurers’ Treasuries and high-grade corporate bonds.
Blackrock and Pimco do that well, and that’s not Blackstone’s business, Chae said.
Blackstone has posted a link to a recording of the conference call here.
The company has posted a copy of a fourth-quarter earnings release, which includes some additional information about the company’s insurance solutions unit, here.
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