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

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)