Why are asset managers and PE drawn to the insurance industry?

Why are asset managers and PE drawn to the insurance industry? | Insurance Business Canada

Why are asset managers and PE drawn to the insurance industry?

Westland Insurance Group, one of the largest and fastest-growing independent property and casualty (P&C) insurance brokers in Canada, announced this week that it has expanded its partnership with Blackstone Credit.

Building on its initial investment into the family-owned brokerage in January 2021, Blackstone Credit has invested an additional $250 million to support Westland’s continued growth, including a facility dedicated to funding the brokerage’s aggressive acquisition strategy. Blackstone Credit’s total aggregate investment into Westland is now over $1.2 billion.

Blackstone Credit, a division of Blackstone, is one of the world’s largest credit-focused asset managers, with $188 billion in assets under management (AUM). Its goal is to generate attractive risk-adjusted returns for clients by investing across the entire corporate credit market, from public debt to private loans. It supports a wide range of companies across sectors and geographies, enabling businesses to expand, invest and navigate changing market environments.

The benefits to Westland are clear. The booming brokerage gains access to Blackstone’s global scale and resources, which has enabled the firm to continue its expansion from coast to coast. What makes independent insurance brokerages like Westland an attractive prospect for asset management giants like Blackstone Credit?

Read next: More insurance brokerage M&A expected for 2022

Mark Friedman, a partner in PwC’s Financial Services Deals practice, recently spoke to Insurance Business about why asset managers and private equity firms are drawn to the insurance industry.

“Asset managers are always looking to grow their asset base,” he said. “To acquire a block of in-force liabilities, you might pay a ceding commission of around 10%. So, if you buy a $30 billion block, you’d pay a $3 billion cede. Think about what it would take to raise $30 billion of AUM through institutional retail fundraising efforts. They earn fees off of managing assets. The single, cheapest, most effective way to grow assets at scale, is through acquiring insurance liabilities because of the leverage ratio.

“The alternative is, if you’re a $100 billion fund and you want to grow to $150 billion, that’s a 50% increase - think about the strategies you have to go out there and implement. You could raise a private equity fund of maybe $8 billion or $10 billion, you could raise a credit fund of a few billion dollars, you could raise a middle-market fund, a healthcare fund – and there is effort, costs, and risk associated with each of those strategies. Compare that to taking some of the capital you already have and putting it to work by buying an insurance company or an insurance block if you already have a platform.”

Read more: M&A insurance – what to expect in 2022

For many of the big private equity players like Apollo and Blackstone, permanent capital vehicles, like an insurance company, are becoming a larger piece of the AUM. Friedman described it as “a very efficient way of putting capital to work” and said he expects to see continued interest in the insurance space moving forward.

“Moreover, I’d say the private equity firms that have credit arms have a double or triple benefit of consolidating the insurance base because in addition to growing AUM (you earn fees for managing assets), and in addition to the earnings you could extract from the actual underwriting income of the insurance company (and these are profitable blocks for the most part), you also have this credit platform that is lending money, you have payment platforms, you have leasing platforms, you have all sorts of credit-related platforms that are generating higher-than-average yields,” Friedman added.

“And what they [asset managers and PE] would typically do is sell those assets off to third parties, earn some fees and earn some spread. Here, they get to keep it in-house and benefit from that higher yield, as opposed to selling it off to a third party. They keep it in the ecosystem, and they still earn those fees, albeit from related parties. So, it helps asset managers and PE firms feed their credit platform, their private equity platform, their corporate balance sheet, and it’s an asset that is earning a return. Add to that the fact that rates are going up, and as rates go up, these insurance assets start to earn higher returns.”