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Alternative Asset Managers Getting into the Insurance Business


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You could do worse than simply betting against any "next Berkshire/Warren Buffett" subject in recent years but the alternative asset managers pushing in to insurance remains interesting to me. Apollo/Athene merger is probably the biggest in terms of strategic importance, Brookfield also moving more in this direction with the addition of American National. At the Goldman US Financial Services Conference at the end of '21, Rowan put the strategy succinctly:

 

"If you think about the alternatives business generally, in the private equity business, everyone understands it, 20% above 8. In the nontraded BDC, the nontraded REIT business, 12.5% over 5 or some metric like that. In the retirement services business, I get 100% over 2.5, but I have to put up $0.08 in capital. Now that $0.08 in capital earns 15% rates of return. So to your point, I can decide whether to hold all that myself or I can through ADIP allow my limited partners to take 2/3 of it."

 

These combinations create a larger permanent capital base, but they come with greater regulatory scrutiny and limitations. They are also generally commodity businesses that on their own trade at low multiples, especially relative to "pure" alt asset managers. I guess my question is how are people going about valuing these? SOTP doesn't seem appropriate, but neither does counting the insurance flows as simple AUM growth. Do companies like Apollo run the risk of turning into financial conglomerates that trade a perennial discount? 

 

 

Edited by Canalyst
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Both insurance cos founded by hedged funds that I am aware off ( TPRE, merged and Greenlight Re)  were a big busts, so I think running a great insurance/ investment  cos is much more difficult than it seems. In both cases, it seems those were high fee permanent capital vehicles in an insurance umbrella and both the insurance part (underwriting) as well as well as the investment part (in Greenlights case at least) sucked wind.

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16 minutes ago, Spekulatius said:

Both insurance cos founded by hedged funds that I am aware off ( TPRE, merged and Greenlight Re)  were a big busts, so I think running a great insurance/ investment  cos is much more difficult than it seems. In both cases, it seems those were high fee permanent capital vehicles in an insurance umbrella and both the insurance part (underwriting) as well as well as the investment part (in Greenlights case at least) sucked wind.

 

Athene has essentially been an Apollo property since its inception, MDD ROE and 20% 5 CAGR of assets

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@Canalyst great thread, BAM/KKR/APO are my top three holdings, I see a lot of value in this business model as well as the general alternative asset management universe. I think it's hard to know how to accurately value these companies, but currently I think APO and KKR are quite inexpensive at current valuations even without knowing exactly how to value the annuity assets or carried interest, just based on Fee Related Earning power. 

 

 

Apollo did about $2.09 per share in Fee Related Earnings in 2021, growing at a 15%+ annual rate, KKR did 2.27 per share, growing faster than that. So valuing the FRE from either one at reasonable multiples (17.5-25 based on trailing FRE even though this earnings stream is growing rapidly) accounts for most (or all) of the market cap of APO/KKR, so you're really paying a very low multiple for the remaining carried interest potential, book value, and in Apollo's case the significant spread related earnings from its insurance business. 

 

@Spekulatius I think these investments are likely to be much more successful than the hedge fund backed insurance companies that you mention because: 1) they are operating at a larger scale without much chance of big underwriting misses based on the annuity book of business; and 2) I think the alt asset managers are way better than hedge funds at sourcing private fixed income / fixed income replacement investments. Think privately originated mortgages, auto loans, aviation finance, clo's, etc. etc. When you buy APO/KKR/BAM today, you are buying an asset light alternative asset management fee related earnings power house combined with captive insurance assets in varying degrees (most insurance exposure in APO). The hedge fund insurance companies were just a captive pool of money to generate hedge fund fees and they turned out to have poor underwriting discipline as well, whereas here you get to own the lucrative asset management business AND the insurance assets. 

 

 

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I have been interested in a Canadian based asset manager called Mount Logan Cap, who also just purchased an insurance company to increase AUM. I know scale is very important in this space(the market cap is only 70M), but they come with very impressive leadership. I'd love to know if anyone else was looking at this name. 

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@RedLion Good Point on the difference between SPO, KKR etc and hedge fund sponsernd insurance cos. I would point out that alternative asset managers need cheap credit more so regular asset managers or investment banks.

Edited by Spekulatius
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What do others think about these PE-to-PE deals?

Just today Blackstone bought a stake in One Manhattan West from BAM.  While BAM is in talks to acquire Blackstone's La Trobe Australian based non-bank lender.  

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2 hours ago, ValueMaven said:

What do others think about these PE-to-PE deals?

Just today Blackstone bought a stake in One Manhattan West from BAM.  While BAM is in talks to acquire Blackstone's La Trobe Australian based non-bank lender.  

 

Despite nominally similar business models I find the overall strategies of BAM, BX, KKR, APO and CG to be fairly differentiated. BAM & BX are fundraising machines and successfully going "down market" to retail/HNW through various products. KKR and CG are still primarily institutional managers with some retail product either via BDC or feeder funds. Then APO which is kind of mid-transformation into a permanent capital spread business with diversified funding sources. 

 

I think the intra-PE sales are representative of those strategies and shifting asset bases to have alignment with funding sources.

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I don't think the hedge fund insurance models and the alt models are all that similar.

 

For example, as I understand GLRE, the idea was basically to have a leveraged Einhorn equity hedge fund.  Einhorn invests like his long/short hedge fund.  The insurance operation provides no-cost leverage.  Ergo, you get leveraged Einhorn returns.  If Einhorn does something like 15%/year and you can get even 1.5 X that, then that's fantastic.  The math is compelling.

 

Unfortunately, at least last I checked, everything went wrong.  GLRE was running a pretty limited type of insurance in order to ramp up the operation and mesh with the long/short equity portfolio.  I believe it was tight margin on the combined ratio to begin with and GLRE didn't do a particularly good job with it.  I'm not sure what the combined ratios were, but I thought they were running above 100%.  So, instead of low or negative cost leverage, the leverage has a cost.  Again, not sure that's correct and haven't checked recently, but something like that.

 

That's not fatal to good returns.  If Einhorn's investing returns were similar to early in his career, a leveraged Einhorn portfolio could certainly overcome a few percent drag.  Unfortunately, GLRE coupled the bad insurance with bad investing.  Lose on the insurance.  Do poorly on the investing, so you pay for leverage of a bad portfolio.  Ouch.

 

APO is a good bit different.  As an initial matter, they have the PE and asset management arms in addition to the newly added Athene portion of the business.  The Athene business is just set up differently than GLRE.  They aren't looking to use the Athene insurance float to create a leveraged long/short equity portfolio.  With GLRE you are talking about Tesla shorts and Office Depot longs.  With Athene, you aren't getting anything like that.

 

Athene generally sells fixed annuities, so fixed payouts.  Invests primarily in credit to cover the payouts+.  Spread between the credit returns and the fixed payouts equals what Apollo is calling spread related earnings (SRE).  Apollo also has some ability for various third party financings.  They are looking to create good private credit.  Athene also has a nice public record of earnings prior to Apollo buying them out.

 

That's not a guarantee that Athene is going to work for Apollo.  Just think they are doing something different than GLRE even though both involve insurance.

 

I wrote this quickly from memory, so I might have made some unintentional mistakes.

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A general correction - ATH/APO are not looking at at insurance as 'float' as it is often understood. That float comes with a defined cost of funds - insurance investors typically assume that this COF should be negative. They are, however, looking at it as feedstock for the asset origination machine.

 

For ATH it is accepted that the cost of funds is positive but what they do, compared to other insurers, is to take on existing books within a certain category of risks (check recent investor day - typically not taking mortality and morbidity risk), and then manage this to deliver a stable spread (so robust ALM is important, but a well-understood problem and can be managed). Second main success criterion is to find those 'high yield but sufficiently high quality' investments that deliver the return kicker needed when 90% of the portfolio has to be in IG government + corporates to back the liabilities you underwrite. As another poster made the point above, if your business is to originate such things to begin with, you're going to do better than hedge funds who typically just buy those things from the likes of APO who originate it.

 

Other parts of the APO portfolio take different risks, but in the end it all comes back to acquiring liabilities/assets and delivering a spread with as much predictability as possible.

 

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2 hours ago, Sunrider said:

A general correction - ATH/APO are not looking at at insurance as 'float' as it is often understood. That float comes with a defined cost of funds - insurance investors typically assume that this COF should be negative. They are, however, looking at it as feedstock for the asset origination machine.

 

For ATH it is accepted that the cost of funds is positive but what they do, compared to other insurers, is to take on existing books within a certain category of risks (check recent investor day - typically not taking mortality and morbidity risk), and then manage this to deliver a stable spread (so robust ALM is important, but a well-understood problem and can be managed). Second main success criterion is to find those 'high yield but sufficiently high quality' investments that deliver the return kicker needed when 90% of the portfolio has to be in IG government + corporates to back the liabilities you underwrite. As another poster made the point above, if your business is to originate such things to begin with, you're going to do better than hedge funds who typically just buy those things from the likes of APO who originate it.

 

Other parts of the APO portfolio take different risks, but in the end it all comes back to acquiring liabilities/assets and delivering a spread with as much predictability as possible.

 

 

Great points, I would highly recommend watching Rowan's talk from the investor day. The below slide from Kelly's presentation was especially helpful in terms of how new reporting will look but also for the strategy in general 

image.thumb.png.815c313543136122b0db7c025a28c763.png

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