(Bloomberg) – When all else fails, lend.
That's the strategy of some of the biggest U.S. insurers as they seek higher returns in an investment universe where buying bonds sometimes means guaranteed losses.
The largest U.S. banks are constrained by post-2008 rules that make it tougher for them to extend loans. So companies such as MetLife Inc. and American International Group Inc. are grasping more market share. While many insurers have been in the commercial real-estate market for decades, the industry is branching out into home mortgages, small-business lending, car loans, renewable-energy financing and student debt.
"There's no question that insurance companies are looking to diversify into new areas and innovate as much as possible," said Adam Hamm, North Dakota's insurance commissioner who serves on the U.S. Financial Stability Oversight Council.
The quiet reshuffling of the lending industry is part of the transformation of American finance following the 2008 credit crisis. Together with hedge funds, private equity shops and tech startups, insurance companies have joined the ranks of shadow banks — firms that act like banks without being regulated like them. Lawmakers and regulators have taken notice of the changing landscape, with Democratic presidential nominee Hillary Clinton promising to " tackle financial dangers" by enhancing transparency and reducing volatility in the emergent system.
Different Standards
Insurers are becoming the new financial supermarkets in part because traditional investments offer minuscule returns — 10-year U.S. Treasury notes yield less than 1.6 percent while some European sovereign debt is negative, meaning investors pay to park their money there. And pushing into more aggressive investments, such as hedge funds, tied up too much capital and resulted in losses in recent quarters.
AIG Chief Investment Officer Doug Dachille said the ventures only make sense for companies with scale because it requires more staffing to originate the loans. "Given the lack of liquidity in the securitized markets, which is how many insurers have previously purchased loans, insurers are now waking up to the reality that it's better to own the loans directly," he said.
Insurers are now responsible for 11.6 percent of the loans in the global private debt market, which includes direct lending, according to data provider Preqin. Firms boosted mortgage funding by 50 percent to $430 billion in the last decade, according to the Federal Reserve.
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In 2015, MetLife, the largest U.S. life insurer, made more property loans than it ever has in its 148-year history. Chief Executive Officer Steve Kandarian said the company plans to keep expanding in 2016 because mortgages have "predictable income streams." MetLife declined to comment. AIG has more than $20 billion allocated to commercial mortgages and is increasing its wager as it pulls out of poorly performing hedge funds.
TIAA, led by Roger Ferguson, is the world's largest investor in private debt, Preqin said. TIAA has also hired ex-Carlyle Group LP money managers to create a venture focused on lending to middle-market companies. A TIAA representative didn't respond to requests for comment.
