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U.S. private equity firms nudge up risk on insurers

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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.

The shift 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.

PE-insurance marriages can be joyous: Asset managers have skills and access to investments that insurers 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%.

 

(Graphic https://graphics.reuters.com/PRIVATEEQUITY-INSURANCE/RISKS/oakpebgyyvr/)

 

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, said a senior structured finance expert who works closely with state insurance regulators.

LIQUIDITY, STRUCTURING RISK

Strategies vary widely. Carlyle Group Inc 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 $43.7 billion portfolio. Carlyle bought a majority stake in Fortitude from American International Group Inc last year.

Apollo Global Management Inc runs all $186 billion in assets of annuity provider Athene Holding Ltd, 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 it doesn’t already own 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.

“Insurance companies are ideally situated to take a certain amount of liquidity and structuring risk,” Apollo Chief Executive Officer Marc Rowan told Reuters. “Excess return (is earned) through accepting less liquid securities rather than taking on credit risk.”

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 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%, according to loan documents reviewed by Reuters and two people familiar with the matter.

Fees that Athene earned for structuring the loan boost Athene’s yield above 4.75%, these people said. 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 plans to exit bankruptcy in a deal that includes Apollo.

The Middle Eastern real estate provides a revenue stream for 24 years, after which ownership reverts to ADNOC, which kept a 51% stake. Reuters could not determine the return, but brokers said occupancy has been falling from relatively high levels.

ADNOC declined to comment.

REGULATORS WATCHING

The build up of difficult-to-sell investments has drawn attention from U.S. regulators and raised concerns that insurers may lack cash to pay a surge of claims in a crisis. The Federal Reserve recently flagged this as a concern.

“What the Fed is concerned about is that these risky assets may not be liquid enough, or they may go down in value sufficiently to endanger policyholders,” said Joshua Ronen, an accounting professor at New York University whose research focuses on capital markets and financial statements.

The Fed declined to comment.

Insurers still appear well-capitalized despite the past year’s economic upheaval. While the pandemic hit industry profits, it did not weaken capital, analysts said.

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.

Still, concern about risk has affected some deals. When Allstate Corp went to sell its life and annuity business recently, it looked for firms not aggressively redeploying assets to riskier investments, Chief Executive Officer Tom Wilson told Reuters.

In January, Allstate agreed to sell 80% to Blackstone Group Inc and the rest to Wilton Re, an insurer owned by the Canada Pension Plan Investment Board. Both sales are expected to close this year.

“There are some people out there who take these assets, they assume the insurance regulators won’t pay that much attention to them. And they swing for the fences. We chose not to even talk to people like that,” Wilson said. “We want our customers to be paid, even though they’re not our customers anymore.”

 

(Reporting by Alwyn Scott in New York; Additional reporting by Saeed Azhar and Hadeel Al Sayegh in Dubai and Kate Duguid and Karen Brettell in New York; Editing by Lauren Tara LaCapra, Cynthia Osterman and Nick Zieminski)

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Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

The Canadian Press. All rights reserved.

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Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

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