European Insurers' Pain Piques the Interest of Private Equity

(Bloomberg) -- For years, Europe’s insurers have suffered because of low or even negative interest rates that depressed investment returns. Private equity firms say they’re ready to help.

The firms are increasingly getting involved in insurance deals in the region, betting their investing expertise can help lift returns from managing premium income, according to Patrick Liedtke, head of the financial institutions group in Europe, the Middle East and Africa for BlackRock Inc.

“We see other sources of capital coming into the industry,” Liedtke, who helps insurers with asset allocation, said in an interview. Takeovers “used to be a lot about consolidation within the industry, but we now see private capital coming in.”

Private equity firms have been attracted to insurers for some time, in part because they give access to large amounts of captive money that the firms can then invest, bolstering assets under management. In the U.S., Apollo Global Management LLC pioneered such a model with Athene Holding Ltd., while Blackstone Group LP recently launched an insurance solutions business.

But philosophically, the two industries are in many ways opposed -- one values stability and is slow to embrace change, while the other is not afraid to take risk and use leverage to juice up returns.

"In the past the discussions with private equity firms were a lot around controlling cost and finding synergies,” said Liedtke. "But today, the question about how effective insurers are with their investment strategy is emerging. So for them changing the investment side of the business unlocks tangible value."

Negative yields have made European insurers more willing to deploy cash into alternative investments such as infrastructure, private assets and real estate, particularly as it becomes more challenging to generate a profit by underwriting risk.

“Your CEO might have been told by his chief writing officer that he’ll earn less money from insuring than before,” Liedtke said. “The CEO then turns to his chief investment officer and says, could we actually earn more just by putting this money to work in the markets?”

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