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Insurers are well-capitalized despite the past year's economic upheaval. While the pandemic hit industry profits, it did not weaken capital. Athene's credit rating, for example, was upgraded this month to "A+" with a positive outlook by S&P Global Ratings. About 7% of Athene's investments are rated speculative, compared with 6% for all insurers, according to S&P Global Ratings.

Private equity firms have spent nearly $40 billion buying U.S. insurance companies in recent years, promising to earn higher returns on the mountains of money that insurers set aside to pay policyholders years or decades from now. The firms are moving some of the money out of traditional low-yield investments such as government bonds into riskier, harder-to-sell assets such as private loans and equity.

PE-insurance marriages can be joyous: Asset managers have skills and access to investments that insurer’s lack, and insurers provide cheap funding. PE firms also earn significant fees; even though their investments do not always capture outsized returns. But PE firms are nudging up risk on a large pool of money. They now own 7.4% of all U.S. life and annuity assets, or $376 billion, double the tally in 2015, credit agency AM Best said. Pending deals could add $250 billion this year, pushing PE ownership to 12%.The higher-yielding investments do not necessarily increase the risk of default but tend to lose more money if they do default, compared with plain-vanilla portfolios, according to senior expert who works closely with state insurance regulators. Still, concern about risk has affected some deals. When Allstate Corp (ALL.N) went to sell its life and annuity business recently, it looked for firms not aggressively redeploying assets to riskier investments .In January, Allstate agreed to sell 80% to Blackstone Group Inc (BX.N) and the rest to Wilton Re, an insurer owned by the Canada Pension Plan Investment Board. Both sales are expected to close this year.

Strategies vary widely. Carlyle Group Inc (CG.O) said it has put the approximately $5 billion of insurance money it manages into buyout funds, credit and alternative investments. The money is part of Fortitude Group's (FRTD.PK) $43.7 billion portfolio. Carlyle bought a majority stake in Fortitude from American International Group Inc (AIG.N) last year. Apollo Global Management Inc (APO.N) runs all $186 billion in assets of annuity provider Athene Holding Ltd (ATH.N), a portfolio that accounts for 40% of Apollo's total managed assets and 30% of the firm's fee-related revenue. Apollo says buying the 65% of Athene will make both companies the most "aligned" with policyholders in the industry. The purchase also shows Apollo's commitment to safe investments, since Apollo's shareholders are exposed to any additional risk. None of Athene's money is in Apollo's flagship private equity funds. Recent deals that Athene calls "high-grade alpha" provide a window into Apollo's strategy of seeking 100 to 200 basis points above similarly rated public securities on about 15% of the portfolio. Athene loaned $2 billion to bankrupt rental-car company Hertz Global Holdings Inc (HTZGQ.PK) in November, and $1.4 billion to the Abu Dhabi National Oil Company (ADNOC), secured by office and apartment buildings in September. Athene's Hertz loan is 85% investment grade and 15% speculative, or junk, grade. The loan earns an interest rate of 3.75%. The loan boost Athene's yield above 4.75%.That compares with 3.2% for investment-grade and 4.8% for speculative debt when the loan was made, according to a bond index and Federal Reserve data. Hertz also plans to exit bankruptcy in a deal that includes Apollo.

This PE-insures bonhomie has caught the eye of regulators and raised concerns about a cash crunch if asset managers had to liquidate large portfolios in a hurry to meet insurance claims. The buildup of difficult-to-sell investments has already drawn attention from U.S. regulators and raised concerns that “insurers may lack cash to pay a surge of claims in a crisis as these risky assets may not be liquid enough, or they may go down in value sufficiently to endanger policyholders”.

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