Insurance Company Asset Management Challenges

AM Best put numbers around something the life insurance industry has preferred to keep abstract. At Athene and Global Atlantic, roughly a fifth of invested assets now consists of loans to affiliated private funds. Not third-party credit. Affiliated paper. At the same time, Level 3 assets, the hardest assets to price (with no active market and significant valuation judgment), now make up a meaningful share of insurer portfolios across the sector. At Athene and Global Atlantic specifically, they account for roughly a third of holdings. The industry usually frames this as a conflict-of-interest issue. That understates what is happening. A conflict of interest suggests two competing obligations that need to be managed. What this looks more like is a closed economic loop. The policyholder premiums flow into the carrier, the carrier allocates capital to affiliated funds, and those funds generate fees for the same private equity parent. That is not a side effect of the structure. It is increasingly the structure itself. Which is why the real regulatory question is not just whether these exposures are disclosed clearly enough. It is whether a life insurance balance sheet, built around long-dated liabilities, reserves, and policyholder confidence, was ever meant to serve as permanent capital for an affiliated private credit machine.

The Financial Times reports that hundreds of billions of dollars of assets originated by private capital groups have piled up in a sleepier corner of the financial system: life insurance and annuity companies, which guarantee retirement savings for millions of people. This trend developed after the 2008 financial crisis, as lending was squeezed out of the banking system into private equity companies. Blackstone, the world’s largest alternative asset manager, has struck a series of asset management deals with insurers, while rivals KKR and Apollo Global Management, Inc. have acquired insurers outright and invested policyholders’ premiums into loans that they originate. As Wall Street’s most aggressive investors have come to control hundreds of billions of dollars of retirement savings, regulators, policyholders and even some industry executives have warned that the sector is pushing into riskier and more opaque assets. Many are concerned that this trend could put policyholders at risk, and that the failure of a large life insurer could have broader consequences for the economy. Colm Kelleher, UBS chair, in November warned that the insurance sector was at the centre of “looming systemic risk” building up in less-regulated corners of the financial system. Recommended Private credit UBS chair warns of ‘looming systemic risk’ from private credit ratings The trade started small, with groups such as Apollo investing money from insurers like Athene into higher-yielding loans, compared with more traditional portfolios of government and corporate bonds, and pocketing the spread over a guaranteed return. This put them at a competitive advantage, allowing them to offer better annuity rates, prompting public and mutual life insurers to adopt many of the same strategies. With more insurers chasing after private credit loans, risk managers have become more concerned about the complexity and illiquidity of private credit investments they hold, as well as the challenges of ensuring that these products are correctly valued. Many are taking a harder look at the private assets that are showing up in their investment portfolios, and bulking up their internal risk management systems. Read the full piece by Lee Harris here: https://lnkd.in/eK4WW9Gu #lifeinsurance

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Asset-liability mismatch is one of the biggest risks life insurers face. If you're writing annuities or fixed-term investment products, a robust ALM framework isn't optional; it's essential. My latest article, Building effective ALM frameworks: A practical guide for emerging annuity providers, is aimed at insurers still building or strengthening their ALM capabilities. It introduces a maturity model to benchmark your current approach and offers clear, practical steps to improve. Regulators across Africa are taking ALM more seriously: - In Nigeria, NAICOM’s new rules now require quarterly ALM reporting and actuary sign-off for annuities. - Kenya has experienced large swings in interest rates. A tough test for any insurer’s balance sheet. And in South Africa, with global political uncertainty and growing concerns over sovereign debt, understanding and managing your exposure to yield shocks is more critical than ever. 🔗 Web links in first comment below #ALM #InsuranceRisk #Annuities #Actuarial #LifeInsurance #NAICOM #NigeriaInsurance #KenyaInsurance #SouthAfrica #AssetLiabilityManagement