AIG-Blackstone Deal A Power Move For Both, Analyst Says

By John Hilton

Wednesday's blockbuster AIG-Blackstone deal is likely to power up both companies in their respective worlds of insurance and private equity, according to a leading industry analyst.

The stakes in this marriage of convenience are fairly obvious, said Charles "Chip" Roame, managing partner of Tiburon Strategic Advisors.

AIG gains "substantial capital," Roame said, "likely to buy other insurance companies."
Blackstone gains $150 billion in insurance assets under management, putting it on par with private equity giants KKR and Apollo, he added.

American International Group is selling a 9.9% equity stake in AIG’s Life & Retirement business to Blackstone for $2.2 billion in an all-cash transaction.

As part of the agreement, AIG also signed a long-term strategic asset management deal with Blackstone to manage an initial $50 billion of Life & Retirement’s existing investment portfolio upon closing of the equity investment, with that amount increasing to $92.5 billion over the next six years.

The deal is just the latest monster transaction between private equity firms and insurance. PE firms are buying up annuity providers, planning to use their investing capabilities to earn better returns on the big sums of money, which is more difficult during the current ultra-low-interest rate environment.

In return, the PE firms earn fees for their services.

"The big PE firms want to secure the permanent capital of insurance companies to invest, so that they do not have to constantly be raising new funds," Roame explained.

Obvious Dance Partners

Several recent moves by their closest competitors helped push AIG and Blackstone toward their massive deal. In the insurance world, Principal became the latest big-name insurer to sharply reduce its life and annuity business last month -- announcing it would cease sales of fixed annuities and much of its consumer life-insurance business.

AIG announced the planned sale of its Life & Retirement business in October, succumbing to pressure from high-profile investors to split it off from the insurer's P&C operations. In May, Chief Executive Officer Peter Zaffino said the company would use an IPO to sell a 19.9% stake.

With 9.9% going to Blackstone, Reuters reported the IPO plan is still in play for the other 10%. The Blackstone deal helps AIG set a strong price for the remaining Life & Retirement business, said Roame, previously a consultant at McKinsey & Company, and a business strategist at Charles Schwab.

Wall Street analysts blessed the deal for AIG. The arrangement with Blackstone "may enhance investment returns [for AIG], but may be at least partly offset by loss of shared costs with General Insurance," wrote Credit Suisse analyst Andrew Kligerman.

Apollo Sets Bar

Blackstone was likely motivated by a March deal struck by rival Apollo Global Management. Apollo fully absorbed Athene Holding in a blockbuster $11 billion merger deal that is expected to close in January.

That deal was much different, as Apollo already owned 35% of Athene and had a long-term deal to manage its assets. Still, it gave Apollo a huge piece of insurance business and matched a deal KKR struck in July 2020 to buy Global Atlantic Financial Group for $4.4 billion.

"This scale is big," Roame said. For Blackstone, the AIG deal "secures its long-term capital" and will allow it to invest in long-term real asset opportunities, he added.

In a report released prior to the AIG-Blackstone deal, AM Best noted the huge private equity industry investment in the life/annuity insurance industry over the last decade. Private equity-owned or sponsored insurers’ admitted assets grew to $604.1 billion in 2020 from $67.4 billion in 2011.

According to the report, annuity premium has accounted for more than 70% of direct premiums written at private equity-owned/sponsored companies since 2011.

Additionally, private equity firms also have infused considerable amounts of capital to spur rapid growth -- a strategy that insurers do not typically execute well. In the first year of private equity ownership, 38% of companies reported increases of over 20% in capital and surplus, rising to 43% in year two and 50% in year three.

Overly competitive crediting rates for immediate growth can be severely detrimental over the long term, if higher investment returns are not realized, leading to operating losses and ultimately diminishing overall financial strength, AM Best noted.

'Higher Yields For Insurers'

As stated in the report, nearly two thirds of private equity insurers also increased their use of reinsurance, as evidenced by a higher ceded/gross premium ratio, by the end of the first year of private equity ownership, compared with the year before they were acquired.

Since 2015, approximately half the premium ceded by private equity insurers was ceded out of the United States, with Bermuda accounting for nearly all of it.

"The investment strategies implemented by private equity owners and sponsors has led to higher yields for insurers," AM Best said in a news release.

However, the report also notes that over the past few years, private equity firms have gotten comfortable with managing insurance assets while adhering to the constraints imposed on their portfolios, such as regulatory and rating agency capital charges for asset risk, asset-liability matching requirements and liquidity concerns.

"As more insurance companies are acquired by private equity firms, the ramifications may become more pronounced for other insurers competing in the same markets," AM Best concluded.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.