Investors Don't Like Asset Managers' Annuity Businesses

Three of the researchers work for State Street and one for Harvard.

What it means: "The evidence suggests that insurance partnerships are not a peripheral trend, but a foundational re-platforming of the alternative-asset-management industry," the researchers wrote in the paper.

But, if the trends the researchers describe in the paper persist, and asset managers with annuity operations simply get bigger, not more profitable or more attractive to investors, that could eventually slow asset managers' rush into the annuity sector.

The deals: The researchers came up with a way to classify the deals based on how much balance sheet capital the asset managers have at risk.

Only two of the 11 asset managers the researchers analyzed have had "insurance-heavy" strategies for more than five years, and that limited the researchers' ability to measure the effects of using an insurance-heavy strategy.

The researchers see the deals Apollo made for Athene and that KKR made for full control over Global Atlantic as "insurance-heavy."

The companies see the deal Ares made for Aspida in 2021, which involved founding an insurer and getting an investment management association for the insurer, as insurance-light.

The researchers put the deal Brookfield made for American Equity Life in 2021, which involved Brookfield getting a minority stake in American Equity and reinsurance, as a middleweight insurance strategy.

The performance: Asset managers say owning annuity issuers gives them access to stable pools of assets that they can use to make long-term investments.

Charts in the new paper show that the insurance-heavy asset managers reported much bigger increases in private credit assets than the other players, but the insurance-heavy asset managers reported only modest increases in private equity assets.

The insurance-heavy players reported much faster growth in assets and revenue than their competitors, but their median operating income has been more volatile than at other asset managers, their median return on equity has been lower and more volatile than at the other players, and their median return on assets has been more volatile and much lower, according to the researchers' charts.

The investors' view: In 2024, shares of the insurance-heavy public asset managers sold for prices that amounted to less than 20 times earnings.

The shares of the public insurance-light asset managers and the ones with no ownership of significant insurance operations were about 25 times earnings.

Investors also seemed to assume that insurance-heavy asset managers would do well when the annuity issuers did well and poorly when the annuity issuers did poorly, the researchers found.

Although the benefits of annuity issuers for asset managers are substantial, investors may put a discount on what they're willing to pay for the insurance-heavy asset managers because "insurance integration requires navigating solvency regulation, asset–liability management, and complex capital structures," the researchers wrote. "Cross-border reinsurance arrangements introduce opacity."

The future: The researchers suggest that the insurance-heavy asset managers' performance will look better over time as managers use their new streams of sticky capital to "unlock capital-intensive and longer-duration private credit infrastructure strategies that were previously subscale or uneconomic."

Harvard Business School. Credit: wolterke/Adobe Stock