There is a long history of cross-sector pairings of insurance companies and asset managers. This includes many examples of insurance company parents of rated asset managers, such as TIAA/ Nuveen Investments, Power Corp. of Canada/IGM, and Equitable Holdings Group/ AllianceBernstein, to name a few. In contrast to the examples of an insurance company owning an asset manager, recent transactions in the sector have predominantly involved an asset manager acquiring or forming a long-term strategic relationship with an insurance company. Activity has accelerated over the past year, with asset managers--especially the alternative asset managers--forming ties with annuity providers. Recent large transactions include Apollo Global Management Inc.'s announcement to merge with Athene Holding Ltd., and KKR & Co. Inc.'s acquisition of Global Atlantic Financial Group Ltd. (GAFG). Investors frequently ask about our views on this trend and what it means for the asset manager and the insurer. Below, we seek to address the most common questions.

Table 1

Frequently Asked Questions

Q: What are some of the favorable drivers underlying the recent transactions between asset managers and life insurers?

We have seen heightened activity over the past year between asset managers and insurance companies partnering through strategic transactions. The global insurance industry, with more than $30 trillion of assets (estimate as of year-end 2020), has become an important strategic growth area for alternative asset managers. Each transaction so far differs in structure, but key similarities regarding the benefits of these tie-ups include:

• The insurer garners access to potentially higher yielding investments--which is particularly attractive in a low interest rate environment--to improve spreads.
• Some annuity providers seek to diversify earnings, adding fee-based revenue (asset management and ceding commissions) via partnership and reinsurance strategies with asset managers.
• For an insurer seeking to pursue reinsurance strategies with asset managers, there is likely a long-term benefit to its capital from the reduction of annuity liability exposure, for some, legacy liabilities may have been depressing returns.
• Asset managers benefit from access to insurance company assets as a source of perpetual capital, adding a stable management fee stream. Perpetual capital is a good match for alternative asset managers' illiquid investment strategies, which typically have longer-term hold and realization cycles.
• An asset manager may also benefit from performance fee potential derived from those insurance assets invested in strategies of the asset manager that pay performance fees. Insurers are turning to alternative asset managers for private equity, real estate, credit expertise, and structured credit among other strategies.
• The asset manager may benefit from scaling certain strategies in which it has origination capabilities, particularly credit, for example, that produces attractive matching to an annuity provider's longer-term liability profile. We believe, however, that the benefits of scale and assets under management (AUM) growth may be offset by the potentially lower fee rates associated with a higher proportion of lower risk strategies the insurer is likely to pursue and/or due to lower fees charged on incremental AUM.
• The asset manager diversifies its limited partner base. We think these strategic relationships may broaden distribution channels for both the asset manager and insurer over time.

A meaningful difference we have seen across transactions lately reflects the asset manager's willingness to grow its balance sheet to pursue a strategic interest in the insurance space. Some asset managers-- Blackstone Group Inc. and Ares Management Corp., for example--have followed a balance sheet-light approach. Blackstone's insurance strategy, including its recently announced acquisition of a life insurance and annuity company from Allstate, is occurring largely through managed vehicles. We consider Blackstone as a financial sponsor in this case. Blackstone's insurance solutions team acts as the asset manager and, pro forma for the Allstate transaction, it expects insurance AUM could exceed $100 billion.

Ares announced the acquisition of F&G Reinsurance Ltd. (F&G), a life and annuity reinsurer, by Aspida Holdings Ltd., an indirect subsidiary of Ares. Through this acquisition, which closed in fourth-quarter 2020, Ares added roughly $2 billion of AUM to the $16 billion of AUM that the company managed on behalf of insurance clients as of year-end 2020.

Other alternative asset managers, including Apollo and KKR, have grown their balance sheets to expand in the insurance space. Apollo had $455 billion of AUM at year-end 2020, including Athene's gross invested assets ($175 billion at the time the merger was announced). While Apollo already manages substantially all of Athene's assets, it does not recognize any of the earnings from its minority ownership stake due to an accounting nuance. The acquisition of the stake it does not currently own will result in Apollo being able to fully recognize earnings benefits once the merger closes in early 2022. Apollo notes a key consideration for merging with Athene (in an all-stock transaction) is the potential for equity index inclusion.

KKR has added significant AUM to its platform following its acquisition of a majority stake in GAFG, with GAFG's $90 billion AUM (at close) building on KKR's FPAUM of roughly $276 billion. For KKR, the additional AUM also provides higher visibility into future fee-related earnings since the company's permanent capital rose to about 33% (from 9%) of the company's AUM base premerger.

In between these balance sheet light and balance sheet heavy "book ends" sit Brookfield Asset Management (BAM) and the Carlyle Group Inc. BAM already has a sizeable balance sheet (for an alternative asset manager) as it embarks on a strategic partnership with annuity provider American Equity Investment Life Holding Co. (AEL) in which BAM will take a minority stake (19.9%) in AEL and become a reinsurance counterparty of AEL. Ultimately, BAM will add about $10 billion AUM to its $277 billion fee-bearing capital (at the time the transaction was announced). BAM, through its majority ownership in Oaktree Capital Management L.P., has the credit expertise and scale to enable it to pursue this type of insurance opportunity.

Carlyle acquired a majority stake in Fortitude Re. The ultimate ownership consists of Carlyle's 71.5% stake (within a Carlyle-managed fund and includes the 19.9% stake that Carlyle previously acquired in November 2018), 25% owned by T&D Holdings and 3.5% by AIG. Carlyle expects to eventually take on management of $6 billion of Fortitude Re AUM.

Q: What do you consider among the top risks to asset managers from transactions with annuity insurance/reinsurance companies?

While we see clear benefits from these team-ups, we also see risks. Private equity (PE)-owned insurers have achieved regulatory approvals and, to date, our ratings on these insurers (financial strength ratings in the 'A-/A' range; see tables 2 and 3) have been largely unaffected. But the long-term success of these pairings remains largely untested in part because recent credit cycles have been mitigated by external measures.

• Among the key risks we see annuity insurers currently facing include potential investment portfolio stress, volatility in interest rates and credit spreads, longevity risk and risk related to asset-liability management (ALM) mismatch due to long-dated insurance liabilities, and challenges to distribution. To the extent any of these hurt an insurer's capital adequacy, there could be repercussions to the asset manager's investment, earnings, cash flow, and liquidity, depending upon its willingness to provide some form of support to the insurer under certain stress scenarios.

• Beyond the increased complexity that comes with insurance (products, accounting and reporting), an asset manager that acquires an insurance companies will face steeper regulation because it will now be subject to insurance regulation. Insurance regulation typically includes limitations on upstreaming capital (in the form of dividends) out of the insurance operating company. While this serves to protect the insurer's ability to meet policyholder obligations, it may curtail returns to the parent.

• Asset managers can benefit from scale in certain strategies through the addition of meaningful AUM as it invests insurance assets. But since this new business may be lower fee, asset manager's EBITDA margins could compress.

• A longer-term potential risk we consider is related to conceivable aggressive growth. Some asset managers have noted they are likely to grow their insurance businesses via capital-intensive businesses such as block acquisitions and pension risk transfer transactions, which have their own unique risk factors to consider, such as underwriting, in addition to being episodic in nature. There is significant competition and tremendous capital available throughout the sector pursuing this type of growth, particularly among the PE-owned insurers as the publicly owned life insurers further rationalize their liability structures. In the past few years and in this current environment, Athene, Global Atlantic, and others are leveraging their ability to price the business considering current economic conditions, such as lower interest rates relative to when the business was written. PE-owned insurers will largely compete on their ability to generate alpha on their key investment strategies to achieve their stated returns. Increased competition, however, among the PE-owned insurers could heighten acquisition prices.

Q: What rating actions have you taken in response to transactions announced in the past year?

Beyond the benefits and risks noted above, our rating actions have taken into consideration each transaction's unique structure and the implications for the business and financial profiles of the entities involved. Since debt to EBITDA is a key credit metric for our view of an asset manager's financial risk profile, if the asset manager pursues a debt financed transaction--though to date has not been the case--this could have a detrimental impact to its financial profile and ultimately the outlook or rating. We also assess ownership considerations and the potential for group support, among other factors. That said, the impact on our ratings so far have been very limited (see table 2).

See the sidebar comparison of APO/ATH and KKR/GAFG rating actions and key considerations.

Table 2

In conclusion, we expect to see further growth in asset managers' insurance strategies. These strategic pairings are likely to continue to take many forms, and we will respond to each new transaction based on its individual characteristics and the potential impact to business and financial risk profiles for both the asset manager and the insurance company. For the transactions that we have seen so far, we believe the long-term strategic benefits are balanced with the underlying risks. As such, we assessed most ratings as unchanged following announcement. We will update our views over time as these strategies grow and mature.

Table 3