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The insurance industry is in the midst of a profound transformation, marked by the integration of insurance, asset management and private capital. This shift has led to strategic acquisitions and collaborations that are reshaping traditional dynamics in the insurance and reinsurance industry. Strategic investors are coming together in partnerships that deliver value by bringing together world-class insurance, reinsurance and asset management capability behind life and annuity business. Of late, this has meant partnerships between asset managers (especially of illiquid and alternative assets) with insurers, reinsurers and investors to get the right combination of assets and liabilities to add as much value as possible. The benefits of this approach are multifaceted, including bringing new sources of capital to fund growth in the insurance industry to meet demand for life and annuity protection from individuals, and to provide attractive risk-adjusted returns to investors.
Private Capital in the Insurance Arena
Life and annuities companies are attracting private capital to the insurance market to support the robust asset portfolios on their balance sheets (to meet future payout liabilities). Until the actual payout occurs, these assets must be strategically invested to yield returns, all the while backed by investor capital. Typically, the cost of servicing these liabilities is less than the potential investment gains, delivering attractive spread margin to investors.
Insurers also present significant potential for scale. McKinsey & Company estimates that across Europe, traditional life liabilities amount to €4.5 trillion. In the US, life and annuity insurers manage $4.5 trillion in assets in their general accounts, with $1.5 trillion in separate variable-annuity liabilities, and an additional $3 trillion in defined-benefit liabilities.
In 2021, private investors announced deals to acquire or reinsure more than $200 billion of liabilities in the US. Today, platforms backed by these investors manage approximately $600 billion in life and annuity assets in the US. Still, the growth potential is immense, estimated to be nearly $4 trillion of in-force liabilities and new business inflows.1
The platforms attracting private capital can be categorized into three segments: alternative asset management firms with insurers, insurers with asset management partners, and asset manager-insurer combinations. These partnerships often revolve around core capabilities in asset management, liability origination, and asset-liability management. Firms with expertise in these areas present attractive opportunities for strategic partners to invest and gain accelerated scale (See Figure 1).
Figure 1: Three Types of Reinsurance Platforms Attracting Private Capital
The Launch of Prismic
Helping to define the trend of asset manager-insurer combinations, in September 2023, Prudential Financial, Inc. (PFI), Warburg Pincus, and a small group of global institutional investors launched Prismic Life Reinsurance Ltd. (“Prismic”), a growth-oriented platform that aims to create long-term value potential for cedants and investors, with $1 billion in equity.2 Alongside the ambition to grow its reinsurance relationship with PFI materially in years to come, Prismic aims to build partnerships with other insurers globally seeking third-party reinsurance as well.
PGIM Multi-Asset Solutions (PMS), a multi-asset solutions provider offering strategic asset allocation services and portfolio management, delivers the asset management services for Prismic.
PMS brings together portfolio analytics and portfolio management capabilities to optimize a strategic asset allocation that will position Prismic to meet its long-term liabilities. Additionally, on an ongoing basis, PMS optimizes the portfolio and identifies tactical allocation opportunities to capture additional relative value (See Figure 2).
Figure 2: Four Key Portfolio Sleeves of Prismic's Balance Sheet
Combining asset-liability management, portfolio strategy, asset allocation, and asset management expertise to develop integrated solutions, PMS is an ideal partner to address the challenges and opportunities faced by Prismic. Access to PGIM’s strategies across public and private assets, including proprietary asset origination capabilities, allows PMS to leverage expertise in active management, including credit and risk management. In addition to PGIM’s capabilities, Warburg Pincus’ alternative capabilities also support Prismic.
PMS’s active portfolio management approach operates at three levels of focus:
- Asset allocation recommended by PMS centers on solutions-driven portfolio analytics, with a focus on relative value views across asset classes, additions of new investible opportunities, risk and liquidity management, ALM and an aggregated view of performance across managers.
- Asset class analysis determined by the underlying managers delivers sector-level expertise in origination and underwriting by borrower and geography, with focus on downgrades and watch lists along with credit rating richness/cheapness.
- Integration of macro-level insights shared by PMS and subadvisors including economic conditions and their potential effect on a particular asset class, credit spread relative value, identification of emerging risks, and loan origination trends and market conditions.
The capabilities offered by PMS, along with other PGIM and Warburg Pincus capabilities, create an integrated solution for Prismic’s asset-liability management and asset management needs in support of Prismic’s long-term growth strategy. Additionally, it enables the platform to provide exposure to a predominantly investment grade portfolio, diversified with alternatives exposure from PGIM and Warburg Pincus, all in a dividend-yielding structure for its investors.
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1. Insurance investors: Priorities and opportunities
2. Prudential Financial, Inc. and Warburg Pincus Announce Launch of Prismic Life Re
The opinions expressed within are those of the authors as of January 2024 and not necessarily of PGIM. The investments and returns discussed within do not represent any PGIM product. This material makes no implied or express recommendations concerning how a client's account should be managed. This material is not intended to be used as a general guide to investing or as a source of any specific investment recommendations. In providing this material, PGIM is not acting as your fiduciary. The comments, opinions and estimates contained herein are based on and/or derived from publicly available information from sources that PGIM believes to be reliable. We do not guarantee the accuracy of such sources of information and have no obligation to provide updates or changes to these materials. The underlying assumptions and our opinions are subject to change. Distribution of this information to any person other than the person to whom it was originally delivered is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof, without prior consent of PGIM is prohibited.
