Hi WSO - perhaps an unusual topic/question. I've become interested in the relationship dynamics between PE and insurers. For example, the Apollo / Athene relationship - essentially, Apollo built Athene (a life insurer) to effectively increase the amount of capital they manage, a strategy employed at a time when liquidity was lacking. I'm sure this is a strategy that other funds try to emulate - I remember Cornell Capital invested in Talcott Resolution a couple of years back.
Is anyone familiar with and can suggest any primers / books / academic papers / etc. that are helpful for understanding the dynamics behind these relationships? As well as the math / more technical aspects of evaluating these businesses? I've read the public filings but they are obviously limited and only helpful up to a point. I've never worked with a company in the insurance/finance space so I'm interested in doing a bit of independent reading here, and have a preference for the wonk-ish. Thanks!
Insurance companies make money in two ways -- underwriting profit (premium collected less claims paid out) and investment income. When you pay an insurance company to cover you for a loss that may or may not happen over the course of the next few years, the insurance company invests it in the meantime. You should read up on Hedge Fund Reinsurers. Insurance businesses are great at raising capital (collecting premiums) but not so great at investing it. Hedge funds are (supposed to be) much more efficient investors. Put them both together and you (theoretically) have a great match.
There is a fine line, though. Regulators don't like it when insurance companies invest in risky assets (if you lose the $$ investing then the policyholders are screwed). There is a lot of back and forth here. Also, there are tax advantages to having an insurance / reinsurance company -- especially one that is domiciled in Bermuda or some other tax haven.
I'm not sure Talcott was a relevant example -- firms buy up books of business in run-off (not writing / collecting any more premium) for a few reasons.
Interesting - thanks for the write up, very helpful.
I think a company called Berkshire Hathaway run by a guy named Warren Buffett may have dipped its toe into insurance as a way of leveraging float for investments
They are an obvious example lol but I am more interested in the extent and manner to which traditional PE funds today (as opposed to 50 years ago in the case of BRK) try to replicate the strategy
I think @jm28 covered it fairly well, but insurance companies (esp. life insurers), have very sticky capital bases due to the long duration of their liabilities, which creates the opportunity for these companies to take longer term risk (and allows them to invest in relatively illiquid assets). Someone else already mentioned it, but these companies historically have been very conservative investors, partially due to regulatory reasons and also partially due to the general conservative culture of most life insurers. Because of these flaws, there seems to be a large trend of PE/alternative asset managers trying to raise money from insurance companies due to capitalize on this opportunity. Blackstone for instance just started an Insurance Solutions Group which is planning on raising hundreds of billions from insurers (you also have outright purchases or partnerships in the case of Athene/Apollo). As for primers, books, etc., there likely isn't anything out there intended for formal education. You could try to read through some of Apollo's public filings, or you could try learning more about the insurance industry, their costs of capital, typical investment portfolios and net yields, and it will likely make more sense as to why this trend is occurring and the mechanics of the PE/alt. asset managers/insurer relationship.
Agree -- Investor presentations are helpful (especially when the intended audience isnt too familiar with the insurance space). Also worth flipping through the below short report released by a shortseller of Green Light Re to help balance out the overly optimistic materials coming from the other side. It speaks to some ulterior motives that these buyside firms may have for starting a reinsurance business. Hope this helps.
http://www.sunesiscapital.com/greenlight
another helpful presentation from Athene
https://ir.athene.com/Cache/1001246212.PDF?O=PDF&T=&Y=&D=&FID=100124621…
Very much being developped in Europe at the moment too, check out Rothesay.
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