Alternatives get a warm welcome from insurers

Insurance companies are starting to seek out alternative investment managers to handle discretionary, multistrategy portfolios, the money managers say.

Insurance companies are more open now to alternative investments as a way of getting higher returns than their low-performing fixed-income portfolios, while staying within the risk limits set by the National Association of Insurance Commissioners, the U.S. insurance regulator.

This is great news for alternative investment managers trying to get a larger slice of the estimated $17.8 trillion in insurance company assets worldwide as of December.

So far, alternative investment firms have been getting into the business of managing insurance company assets in one of two ways. A few larger alternatives managers have bought insurance companies, gaining control of insurance company assets. Examples include Goldman Sachs Group Inc., Guggenheim Partners LLC and Apollo Global Management.

Apollo's insurance unit, Athene Asset Management, had $61 billion in assets under management as of June 30 related to a fixed annuity insurance company owned by an Apollo subsidiary, Athene Holding Ltd. About $10.4 billion of Athene Asset Management's assets are invested in Apollo Global Management funds or other investment vehicles, or subadvised by Apollo, according to Apollo's website. Apollo executives were unavailable for comment.

A second way is that some insurance companies are buying stakes in alternative investment managers, keeping the managers' interests aligned with theirs, as well as investing with them.

In January 2013, Allied World Assurance Co. Holdings, a Zug, Switzerland-based insurance company, bought a minority stake in private debt firm Crescent Capital Group, Los Angeles, and invested $500 million with Crescent in a diversified credit portfolio.

In October 2012, Allied World also acquired a minority stake and invested $500 million with hedge fund manager MatlinPatterson Global Advisors LLC, New York, and, two months later, took a minority stake in Aeolus Capital Management, a Bermuda-based asset management company that invests in the property catastrophe reinsurance and retrocession market.

Allied World is not alone. Alleghany Corp. last year bought a 6.25% stake in Los Angeles-based Ares Management LP and committed $1 billion in investments the insurance company cannot make in-house, including to Ares' credit opportunity strategy, said Antony P. Ressler, chairman, co-founder and CEO of Ares.

Ares' insurance business is the money manager's fastest growing unit, said David Reilly, senior partner and head of Ares Insurance Solutions as well as head of business development. The firm manages more than $5 billion for insurers.

“We believe that insurance companies will continue to be the fastest growing investor segment of Ares Management

“High-grade structured assets, non-investment grade corporate credit and self-originated loans to companies or commercial real estate - all strategies which we consider to be on the conservative end of the alternative asset spectrum - are in the highest demand from insurance companies,” Mr. Ressler said.

Costas Komodromos, senior vice president and head of insurance general account business in the Boston office of Franklin Templeton Investments, said insurance companies are a growing source of capital.

Insurers are increasingly interested in multiasset class solutions in which Franklin Templeton is given full discretion. The firm manages $40 billion in these strategies, but the amount run for insurers could not be learned.

“We have seen that interest and we do anticipate it will increase,” Mr. Komodromos said.

Insurers' willingness to increase their exposure to alternatives stems from the low interest-rate environment, said George Caffrey, head of the insurance investment advisory group in the New York office of Towers Watson Inc.

Insurers are looking at alternative investment asset classes “in order to increase their total return and income,” Mr. Caffrey said. “The pressure has been building and how much additional risk diversity they've been willing to put into their portfolios has increased.”

As insurers look to build their exposure to riskier assets, they are giving outside managers discretion over portfolios of multiple types of investments, he said. These unconstrained portfolios could include investments new to insurance company portfolios, such as non-agency residential mortgage-backed securities.

“We have seen insurance companies looking to third parties to manage certain aspects of their portfolio in an advisory or discretionary basis,” Mr. Caffrey said.

The reason is that “insurers are not built to turn on a dime,” he said. So they are delegating to outside money managers who can react more quickly to take advantage of changing market dynamics including rises in interest rates, Mr. Caffrey explained.

Still, insurance companies are keeping a lid on most of the riskiest, least liquid alternative investments. According to London-based alternative investment research firm Preqin, insurance companies' average real estate allocations rose to 6.5% in 2014 from 2.4% in 2011 — the first year the London-based research firm collected the data.

During the same period, private equity was relatively flat, dipping to 2.5% from 2.7%. Hedge fund exposure dropped to 2.5% from 3.8%.

Insurance companies are different from other institutional investors in that they have to invest in higher-grade alternative investments, Ares' Mr. Reilly said.

Money managers have to be “sensitive to insurance companies' asset-liability issues,” Mr. Reilly said. That, and the need to remain within the risk limits set by regulators, is why only a slim portion of insurance company assets is invested in such asset classes as private equity and hedge funds.

At the same time, insurance companies are among the investors that are gravitating toward multistrategy discretionary portfolios, said Charles Dallara, chairman of the Americas and vice chairman of the executive board of Partners Group, the Baar-Zug, Switzerland-based alternative investments firm.

“It's a global trend,” Mr. Dallara said.

Insurance companies along with other institutional investors are less interested in investing in specific products and more interested in constructing multiasset-class portfolios, he said.

“It's more a question of adapting to the global environment today because it is much more difficult to be an investor,” Mr. Dallara said. “There is so much submerged risk.

“The more flexibility we have to invest around the globe, the better off we are and the better off they (investors) are.”