Private equity’s recent obsession with grabbing life insurance assets is bumping up against its core principle of relying on other people’s money. Blackstone this week announced that it would acquire a tenth of AIG’s life insurance unit for $2.2bn. Blackstone will then assume management of $50bn of AIG insurance liabilities, earning fees for moving policyholder money into more complicated credit investments. 

Blackstone has eschewed using its own balance sheet to acquire insurers outright. Two arch-rivals, KKR and Apollo, have taken the opposite approach. Each has combined with a large life insurer in deals that have altered their orientation. It may be that multiple operating models can coexist but the land grab in private credit is forcing tough decisions about the structure of these titans.

More than a decade of rock-bottom interest rates have devastated legacy insurers. Annuities and life insurance products promised returns to policyholders that cannot be delivered today in traditional fixed income securities. The likes of Apollo, KKR and Blackstone have built their own debt origination machines. These lend in exotic forms to companies as well as to the owners of properties, factories or machines. Higher interest rates charged are not for the credit risk but rather the illiquidity and complexity permitted — or so the story goes. In Apollo’s case, despite a large stake in its insurance affiliate Athene, investor questions about how it earned hundreds of millions of dollars in annual fees ultimately helped to push it to join forces fully and end the principal/agent controversy. 

The stake that Blackstone is taking in the AIG life unit presumably helps to align the interests of the two sides. Blackstone says that it is fully committed to remaining “asset-light”. It claims that its wide range of insurance clients demonstrate that the fee-first approach is working. But the fact that rivals are willing to abandon this traditional approach for a riskier and more expensive one demonstrates the strength of interest in insurance and private credit.

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