Shorting alternative asset manager insurance balance sheets
The guest argued that alternative asset managers have created a highly leveraged, systemic risk by using insurance companies as permanent capital vehicles backed by illiquid, poorly rated assets.
The argument
The speaker asserted that these insurance balance sheets are leveraged up to 70 to 100 times, holding significant level 3 assets and BBB-rated CLOs. If policy surrenders spike even slightly, these insurers will face severe liquidity mismatches because their assets are highly illiquid and cannot be easily sold.
The thesis, stress-tested
✓ What validates it
- ✓A rise in policy surrender rates into the single or low double digits
- ✓Downgrades of insurance debt or underlying CLO tranches by major rating agencies
▸ Risks discussed
- ▸Regulators may continue to grant fair value or mark-to-market exemptions to prevent forced liquidations
- ▸Surrender penalties (e.g., 7% in year one) may successfully deter policyholders from pulling capital during a panic
Hear it yourself
"So Apollo created an insurance company or bought an insurance company, Athene. KKR did the same with a company and all the other big alternative asset managers that are publicly traded have a giant arm of managing insurance capital. And I also believe that a lot of this insurance capital is in the health and life space."
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