A company whose assets it manages is looking to bulk up by buying blocks of fixed annuities

FN Financial News

Blackstone Group is planning to build its insurance business into a powerhouse as it casts about for new sources of cash in a bid to build a trillion-dollar stockpile of assets.

Blackstone, which already manages around $50bn of fixed-annuity and other insurance assets, has told investors it aims to more than double that over time. The business has the potential to one day become the private-equity firm’s largest, Blackstone executive vice chair Tony James told investors in September.

The effort figures prominently into chief executive Stephen Schwarzman’s goal, set last year, of expanding the investing giant’s assets to $1tn by 2026, up from just over $500bn now. Besides insurance, Blackstone is building businesses to invest in infrastructure, life-sciences and fast-growing companies.

There is no guarantee the firm will be successful. Blackstone’s infrastructure business, for one, has gotten off to a slower start than some expected when it announced plans in 2017 to raise as much as $40bn. Blackstone says it always expected building the infrastructure platform would be a multi-year process and that it has already raised almost $7bn.

At the center of Blackstone’s insurance strategy is life-insurance company FGL Holdings. Formerly known as Fidelity & Guaranty Life, it became one of Blackstone’s biggest clients overnight when a special-purpose acquisition company, or SPAC, in which Blackstone invested bought the firm in late 2017. As part of the deal, Blackstone got the right to manage FGL’s roughly $25bn of assets.

FGL, which is publicly traded, has been undergoing a transformation since then. Helmed by co-executive chairs Chinh Chu, a former Blackstone partner, and insurance veteran William Foley, FGL has been working on boosting its credit rating, upgrading its technology and shaking up management. In December, Blackstone’s then-head of insurance Christopher Blunt became FGL’s chief executive.

Now, FGL is looking to bulk up by buying blocks of fixed annuities, which pay owners a set amount of interest over the life of the contract. Insurers make money by earning more on the money handed over by buyers than they are required to pay out.

Many insurers have struggled to meet earnings targets in the era of low interest rates and have put blocks of fixed annuities up for sale. Asset-management firms have stepped in as buyers, believing they have the investment savvy to make profits with structured securities and other investments that many traditional insurers aren’t as comfortable with.

FGL is in exclusive talks to buy the fixed-annuities book of Allstate in a deal that could be worth around $2bn, and is among bidders for smaller annuities provider Lincoln Benefit Life, which is owned by closely held Resolution Life Group Holdings, according to people familiar with the matter.

The more assets FGL accumulates, whether through acquisitions or by selling new annuities,  the more Blackstone has to invest. Blackstone is also trying to convince insurance companies it doesn’t own to give it more of their assets to manage.

Blackstone puts much of the new insurance money to work in its real-estate debt business and in private-credit funds managed by Blackstone’s credit division, GSO Capital Partners, which had $132.3bn in assets at the end of the first quarter.

Early results have been promising. FGL’s investment yield climbed to 4.64% in 2018 from 4.21% in 2017, while the risk rating on its investments as measured by the National Association of Insurance Commissioners remained the same, according to an April 5 FGL investor presentation.

Critics at rival insurance companies and academics have argued that such vehicles are riskier than they might seem because they often blend riskier pieces of assets like collateralised loan obligations or mortgage-backed securities with safer ones, and that regulators don’t fully understand them. Proponents counter that companies like FGL are more focused on risk management than most US life insurers and are transparent about their assets.

Blackstone is hoping it can replicate the success of Apollo Global Management, which joined with former American International Group. executive James Belardi in 2009 to build what would become Athene Holding.

Fueled by an investment from a publicly traded vehicle Apollo controlled, Athene was able to buy up fixed-annuity assets on the cheap in the aftermath of the financial crisis and sign them over to Apollo to manage. Between the end of 2009 and the first quarter of 2019, Apollo’s credit business grew more than 10-fold to $193.7bn in assets, with nearly 60% of that stemming from its relationship with Athene, which is publicly traded.

At first, few outsiders recognized Athene’s potential as it scooped up smaller chunks of annuities. Blackstone was busy building up its highly successful real-estate business. But after Athene bought the US operations of British insurer Aviva for $1.55bn in 2013, competitors took note.

“Obviously, Apollo did very well with the business,” Blackstone’s James said in an interview. “But we wanted to pursue our own path.”

Blackstone found its opportunity in 2017 when Fidelity & Guaranty terminated a $1.6bn agreement to be acquired by China’s Anbang Insurance Group.

Chu and Foley had formed a SPAC to buy a financial asset and counted a Blackstone fund among its investors. The SPAC paid $1.84bn for F&G, beating out rivals including Athene.

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