As private equity giants continue to pile into the insurance business, from courting them as clients to owning them outright, Blackstone is hoping AI will give it a leg up to capture more of the market.
Managing risk is not new on Wall Street, the practice has existed essentially for as long as the business of banking and lending itself. But Blackstone has been quietly building out its risk-management capabilities with AI. The tech is improving the way Blackstone monitors portfolio trends and measures the impact certain scenarios, like another financial crisis, might have on insurers’ portfolios — and their ability to comply with their own regulations and obligations to policyholders.
Insurance companies represent a big opportunity for private equity firms, who invest with the accumulated premiums paid by millions of everyday Americans. For PE firms, insurers offer a steady stream of capital compared to the typical fundraising cycles that occur every few years. It’s good for insurers too, giving them a chance to earn higher-yielding assets. But investing money on behalf of highly regulated insurance companies within the opaque world of private credit, often referred to as “shadow banking,” has drawn scrutiny from regulators and ratings agencies.
Blackstone’s use of AI to access more data and perform more vigorous analysis may help assuage those concerns. Blackstone manages some $192 billion of assets for insurers, making up almost one-fifth of its total $1 trillion assets under management.
“The biggest use of AI right now inside of BXCI, the credit and insurance business, is focused on a risk-management platform for our insurance business,” John Stecher, Blackstone’s chief technology officer, told Business Insider.
Blackstone has been building cloud and data science capabilities for years, and it’s used the tech to supercharge its real-estate and private-equity businesses. Now, the PE giant has opened up its tech stack for insurance clients’ benefit. Blackstone is leveraging AI to access real-time and continuous data about the economy at-large and geopolitical events to improve how it forecasts the impact of these market events on insurers’ portfolios. The info can help with everything from informing changes to clients’ asset allocation to ensuring they comply with their regulations.
One platform allows Blackstone to simulate the great financial crisis, the recent regional banking crisis, or interest rates going up 10%, Stecher said. Then, portfolio management teams can see the impact on the underlying assets in insurers’ portfolios and how that affects returns.
Another tool provides insurance clients with visibility into these simulations, he added, which is important given the back-and-forth between BX and its clients when reviewing asset allocation and investment strategy.
The simulations also help insurance companies better understand the impact to regulatory obligations, like maintaining certain capital ratios, under different bad scenarios. It’s not just insurance clients that benefit from AI to bring more transparency to the cloudy private credit market.
“With the rise of private credit has come increased demands from lenders, clients, and LPs regarding both financial data on private companies to which we lend, as well as the terms and conditions under which we originate loans,” Stecher said.
The move is pushing Blackstone to explore how it can use AI to search for different credit covenants buried within the myriad of loan contracts the firm has issued. This requires more frequent, transparent, and robust reporting of these companies on a more real-time basis, he said.
Why insurance companies like private credit, and why private equity likes insurance
As banks braced for a new wave of regulations that would make it harder for them to lend, private equity firms, not beholden to the same rules, rushed in to fill the gap. This gave birth to the private credit boom. Insurance firms were among the companies that flocked to PE firms for alternative sources of capital.
With private credit, insurance firms can invest in a more diversified set of assets with greater yield (and, albeit risk) than public credit markets, like vanilla corporate bonds. And because insurance companies often have long-term horizons with their financial obligations to policyholders, they can invest in less-liquid asset classes, like private credit. The move to private-credit is also paying off — private-debt funds returned 4.2% in 2022, when investment-grade corporate bonds lost 16%, according to PitchBook data.
Recently, Blackstone has been refining its insurance solutions strategy. In September, the company announced it was combining its private credit and insurance businesses with the aim of being a one-stop shop for insurance, pension fund, and private wealth clients. It has become the firm’s fastest-growing segment. Leading the unit is Gilles Dellaert, who previously headed up Blackstone Insurance and nearly tripled the assets it manages for insurers since joining in 2020.
But to win more insurance clients, Blackstone must compete with the likes of Apollo Global Management, Carlyle, and KKR, which have also been keen on insurance. Apollo, for instance, can trace almost half of its assets under management to Athene, an insurance company it helped create and later merged with. And then there are the regulators and ratings agencies that Blackstone will also need to contend with.
However, that’s not giving Blackstone pause. President and COO Jon Gray praised the “very strong momentum” the company is seeing in its insurance channel during its most recent earnings call in January.
On the heels of growing insurance assets under management 20% between 2022 and 2023, “we have a clear line of sight to $250 billion over the next several years with existing clients alone,” Gray said.