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Jonathan Gray. (Photo: Simon Dawson/Bloomberg)

Life Health > Annuities > Fixed Annuities

Private Equity Firms Boost Life Insurers' Investment Returns: Blackstone Exec

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What You Need to Know

  • Blackstone COO Jonathan Gray says private equity firms can help insurers create high-grade but illiquid, long-duration assets.
  • Many large insurers have rushed to sell part or all of their life and annuity operations to private equity firms in anticipation of changes to reporting rules.
  • Gray suggested that benefits from recent interest rate increases outweigh fears that rates could spike.

A top Blackstone Group executive told insurance sector watchers Wednesday that private equity firms can help life and annuity issuers earn higher investment returns without adding to default risk.

Marrying private equity firms’ investment origination abilities with the life and annuity issuers’ hunger for high-grade, long-lived assets makes a lot of sense. said Jonathan Gray, president and chief operating officer at Blackstone. This is becoming a key driver of growth in private equity firms‘ involvement in the life and annuity sector.

Gray said private equity firms like Blackstone understand the need to create high-quality assets for their life and annuity clients.

“This is a really important industry,” Gray said. “We want it to be financially sound.”

Gray was speaking online at S&P Global Ratings’ 38th annual insurance conference.

What It Means

S&P ratings affect life insurers’ borrowing costs and their ability to sell products such as life insurance and annuities.

Conference attendees include investors, federal regulators, state regulators, investment bankers and others. Their perception of private equity firms’ involvement in the life and annuity sector could affect who owns the insurers responsible for your clients’ personal protection and retirement income planning arrangements, and the supply and cost of life and annuity products.

Company Types

The policyholders themselves own some insurers, which are known as mutual insurers or, in some cases, insurance cooperatives. Families or small groups of investors own many other “privately held” insurers.

Federal law defines insurers with many ordinary retail shareholders as being “publicly traded.” Those insurers must meet a wide range of extra requirements, including requirements to post public quarterly and annual reports on their performance.

Private equity firms can be either privately held companies or publicly traded companies. Because federal law classifies private equity firms and their investor clients as large, sophisticated investors, the firms can invest in “private equity,” or shares of stock unavailable to ordinary public investors.

Private equity firms can also invest in private bonds and other holdings beyond the reach of small investors.

The Private Equity Issue

New Financial Accounting Standards Board insurance and annuity obligation reporting rules are set to apply to publicly traded life insurers by the end of the year. Observers believe the new rules will make parts of publicly traded life insurers’ earnings reports look much more volatile.

Some insurers believe that the new volatility will frighten retail investors, but that private equity owners will understand that the new volatility is mainly the result of the new accounting rules, not the result of a sudden change in the life insurers’ finances.

Partly because of the looming rule change, many large insurers have rushed to sell part or all of their life and annuity operations to private equity firms.

Analysts at the National Association of Insurance Commissioners, federal regulatory agencies and rating agencies like S&P have been wondering what, if anything, the increasing role of private equity ownership in the life and annuity sector means.

Gray’s Views

Gray noted that Blackstone’s role in the life and annuity sector is somewhat different from the role of some other private equity firms in the sector.

Some big private equity firms and their affiliates now own big life insurance businesses of their own. Blackstone has bought some life and annuity insurers, and it has invested in other insurers, but it sees itself mainly as a company that helps life insurers originate and manage assets, not as an insurer in its own right, Gray said.

Typical investors need liquid assets, or assets that can be converted into cash quickly, but life and annuity issuers are set up in such a way that they can hold many long-duration investments to maturity.

Gray said a private equity firm can increase a life and annuity issuer’s investment yields by connecting it with individuals or entities willing to pay extra for illiquid financing arrangements.

A private equity firm with a strong asset origination pipeline can also improve a life and annuity issuer’s yields by reducing the percentage of the deal revenue flowing to the companies that set up and oversee the financing arrangements, Gray said.

Some regulators and others have asked whether private equity firms might have a financial incentive to saddle life and annuity issuers with risky investments.

Gray rejected that idea. He reported that Blackstone moved to reduce the percentage of relatively risky alternative assets in the portfolio of one insurer — Allstate Life — after affiliates acquired Allstate Life from Allstate Corp., in 2021.

Life insurers themselves have been originating assets classified as alternative assets, such as commercial mortgage loans, for many years, Gray said.

Rising Rates

Interest rates have jumped in recent months. The spreads, or gaps, between what riskier borrowers pay and what the lowest-risk borrowers pay have also widened, Gray said, adding that thanks to rising rates and widening spreads, life insurers are getting yields that are about 2 percentage points higher than they were in the recent past.

Gray acknowledged that some analysts have warned that a sudden, extreme spike in interest rates could hurt life insurers, by causing some customers to drop life insurance policies and annuities and move money into other arrangements.

But, “generally, I would say, for the insurance industry, rising rates should be helpful,” Gray said. “This is a sector that’s been unloved for a long time in the public markets, and I think that’s going to change.”

Pictured: Jonathan Gray. (Photo: Simon Dawson/Bloomberg)


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