CORRECTED-BREAKINGVIEWS-Mega-merger warps private equity's insurance logic

By Jonathan Guilford

NEW YORK, March 30 (Reuters Breakingviews) - The private-credit battle of titans between Marc Rowan and Steve Schwarzman just took an unexpected turn. The buyout bosses at Apollo Global Management APO.N and Blackstone BX.N have taken different approaches to competing in insurance annuities. A mega-merger between policy underwriter Corebridge CRBG.N, in which Blackstone holds a stake, and peer Equitable EQH.N alters the competitive calculus.

Apollo and Blackstone tout their respective models. Rowan’s shop is a closed loop, with asset managers sitting next to its wholly-owned Athene, now the largest individual annuity seller in the United States, according to trade group LIMRA. Blackstone instead promotes an “asset-light” model, which focuses on helping third-party insurers source the high-yielding, hard-to-trade debt used to fund policy payouts.

The competition is muddled. Apollo packaged $16 billion of investments for third-party insurers in 2024; Blackstone bought 9.9% of Corebridge in 2021, before AIG AIG.N spun it out. In return, it agreed to manage up to around $90 billion of the company's assets. Results have been mixed. Since going public in 2022, Corebridge shares are up only 20% while Apollo’s doubled.

AIG has been shrinking its stake, weighing on Corebridge's valuation. The annuities revolution also focuses on fixed policies, which provide helpful predictability for private markets. Corebridge has been sloughing off so-called variable policies, which wrong-footed insurers in years past.

Rival Equitable trades at a similarly depressed valuation multiple. Like Corebridge, it is tied to a major asset manager, AllianceBernstein, but is in the control position with a two-thirds stake. The $22 billion deal between Equitable and Corebridge, unveiled last week, would vault it to the top spot in individual annuities, with a combined $51 billion sold last year compared to Athene's $34 billion, per LIMRA. They also anticipate $500 million in profit-boosting cost cuts, worth a hefty $4 billion today once taxed and capitalized.

There could be other perks, too. Equitable pioneered the RILA annuity, essentially a fixed policy that bolts on downside-protected market exposure. Through complex options trading, policyholders get a product that cushions against losses while capping benefits, similar to wildly popular buffer funds. Traditional fixed annuity sales reached $165 billion in 2023, but they have flatlined since, according to Beacon Annuity Solutions data. RILAs grew 68% over that time, to nearly $80 billion, a testament to financial creativity.

Options are tricky, though. If the market lurches, Equitable might need to post more collateral; as such, RILAs require more liquid backing. AllianceBernstein is not a private markets powerhouse like Blackstone or Apollo, but its skillset suits the merger.

Moreover, if the combined insurer thrives, Blackstone will benefit only so much. AllianceBernstein looks set to benefit most from any incremental, RILA-focused investment. A shifting annuity battle will prompt fresh tactics in this private credit slugfest.

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CONTEXT NEWS

U.S. life insurers Corebridge and Equitable said on March 26 that they had agreed to merge in a $22 billion stock swap leaving Corebridge shareholders owning 51% of the combined company and Equitable investors with 49%.

AIG spun off Corebridge in 2022 and has since steadily reduced its stake while Blackstone bought a roughly 10% stake in 2021. It has entered into an investment management agreement, under which it would manage up to $90 billion of assets over time.

Equitable owns a majority stake in asset manager AllianceBernstein, which will oversee some $100 billion of Corebridge's assets following the merger.

Morgan Stanley advised Corebridge and Goldman Sachs advised Equitable.