Potential fallout from COVID-19 on life and health insurance company balance sheets and income statements has not chilled the interest of alternative asset managers in investing in the sector.
As demonstrated by KKR & Co. Inc.'s July 8 announcement of a transaction to acquire annuity writer and reinsurer Global Atlantic Financial Group Ltd., any concerns about near-term pressure on returns appear to be far outweighed by the long-term synergies of marrying a differentiated approach to managing insurance company general account assets with a platform that possesses attractive products and access to key distribution channels.
While the sort of strategic tie-up with an insurance company promised by the acquisition may be a new approach to the sector for KKR, Co-President Scott Nuttall said during a conference call that partnerships between insurers and asset managers are "well-trodden ground" in response to a question about the regulatory approval process.
Apollo Global Management Inc.'s 2009 launch of Athene Holding Ltd. remains the model for such a pairing, though the precise structures of the arrangements vary widely. Formed to capitalize on global financial crisis-era dislocation in the life insurance industry, Athene has generated attractive returns on equity and growth in adjusted book value per share over the long term. And it is widely viewed as one of the consolidators best positioned to capitalize on inorganic growth opportunities that may emerge as the coronavirus pandemic plays out, including through a co-investment vehicle that involves an Apollo affiliate, Athene and third-party investors.
Both Carlyle Group Inc. and Ares Management Corp. have pursued insurance carrier deals within the past year. The Blackstone Group Inc. invested in FGL Holdings and briefly considered acquiring that company during 2019 prior to the Fidelity & Guaranty Life Insurance Co. parent's signing of a transaction with Fidelity National Financial Inc. that allowed the firm to maintain its investment management relationship with the insurer.
Rather than building a company from the ground up, KKR is buying an entity with a track record dating back to its 2004 formation by Goldman Sachs Group Inc. as Goldman Sachs Reinsurance Group. Global Atlantic completed its foundational acquisition of the life and annuity business of the former Allmerica Financial Corp. in 2005. As of March 31, 2020, it had grown into a company with $87.84 billion in assets that trailed only American International Group Inc. and New York Life Insurance Co. in sales of fixed annuities during the first quarter, according to the Secure Retirement Institute.
KKR officials began regularly talking about opportunities in the insurance arena two years ago as they indicated that insurers were increasing their asset allocation to alternatives. Nuttall said during a July 2018 investor day that KKR was "just beginning to scratch the surface" in the sector.
State regulatory filings at year-end 2019 listed certain KKR entities among an assortment of unaffiliated investment managers for Aflac Inc.'s American Family Life Assurance Co. of Columbus (Aflac), General Electric Co.'s Employers Reassurance Corp. and various Chubb Ltd. subsidiaries. All told, KKR said that it manages approximately $26 billion on behalf of insurance companies — an amount that stands to grow to $97 billion upon the receipt of regulatory approval to manage Global Atlantic's investments.
Commonwealth Annuity & Life Insurance Co., the largest of Global Atlantic's U.S. insurance units, indicated in its most recent annual statement that its investments were managed internally as well as by the affiliated Goldman Sachs Asset Management CLO Corp. and the unaffiliated Guggenheim Partners Investment Management LLC and Hartford Investment Management Co.
Corporate and municipal debt accounted for 34.2% of Global Atlantic's adjusted invested assets as of March 31, with structured products, including mortgage- and asset-backed securities and collateralized loan obligations, representing 30.6% of the portfolio. Various types of loans, including mortgages, represented 29.8% of Global Atlantic's investments. Alternatives only constituted 0.3% of its investments.
Nuttall praised Global Atlantic's existing investments team and, in particular, their experience in real estate and private and leveraged credit, but said he believes KKR can further improve the target's risk-adjusted return profile. Global Atlantic generated an average operating return on equity of 16% over the past three years, and Nuttall said that he expects it can return to the mid-teens level after weathering "a bit of near-term pressure" associated with the pandemic.