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'Slow to insurance,' Brookfield boosts presence with American Equity pact

Another alternative asset manager has partnered with a significant U.S.-based annuity writer to accelerate its insurance-related activities.

Three months after KKR & Co. Inc. agreed to acquire Global Atlantic Financial Group Ltd., American Equity Investment Life Holding Company announced a partnership with Brookfield Asset Management Inc. that incorporates a significant equity investment, a reinsurance component, and access to Brookfield products in targeted asset classes.

Brookfield Chief Investment Officer Sachin Shah described the transaction as "a meaningful investment for us in the attractive U.S. insurance market." It comes only weeks after J. Bruce Flatt, the company's managing partner and CEO, offered his strongest signal to date of growing interest in a business segment that has been emphasized by a number of Brookfield's peers.

"We've been slow to insurance, largely because we believed interest rates were coming down and the greatest risk was buying portfolios where you needed to earn 6%, 5%, 4% or 3% to make your commitments on the other side," Flatt said during Brookfield's Sept. 24 investor day. "We think now, with interest rates at zero, the time is right for us to consider expanding the small insurance operations we have."

It was Brookfield Business Partners LP, Brookfield Asset Management's private equity group, that acquired Genworth MI Canada Inc. in 2019. A review of disclosures of internal and external investment advisers in annual and quarterly U.S. statutory filings finds mentions of Brookfield in that capacity by only Pacific Life Insurance Co. and Factory Mutual Insurance Co. Both companies listed Brookfield among numerous unaffiliated advisers with the authority to make investment decisions on their behalf.

Flatt added that the company also maintains a small operation that engages in pension risk-transfer transactions.

"We've learned a lot doing that, and we think that there's a significant area to grow," he said.

Brookfield's 2019 acquisition of a majority stake in Oaktree Capital Group LLC, and its credit strategies business in particular, has further boosted the company's overall insurance investment management capabilities. Flatt called that aspect of the transaction "a game-changer for us."

Regarding annuities, specifically, Flatt said that the business "could be very attractive" given the long-tailed nature of the liabilities and Brookfield's ability to enhance portfolio returns. But Brookfield has plenty of company in its pursuit of that strategy.

Apollo Global Management Inc.'s growing insurance presence through Athene Holding Ltd., which unsuccessfully bid on American Equity alongside Massachusetts Mutual Life Insurance Co., arguably represents the most prominent alliance of an alternative asset manager and an annuity writer and reinsurer. Other noteworthy examples include Carlyle Group Inc. through its involvement in Bermuda reinsurer Fortitude Reinsurance Co. Ltd. and Ares Management Corp. with its contested attempt to acquire Pavonia Life Insurance Co. of Michigan and the more recent agreement to purchase F&G Reinsurance Ltd.

In another recent development involving a large third-party asset manager, The Blackstone Group Inc. divested its stake in FGL Holdings as part of that company's sale to Fidelity National Financial Inc. but retained and expanded a long-term investment management partnership.

KKR's pending acquisition of Global Atlantic highlighted that firm's pursuit of what CFO Robert Lewin characterized during a virtual investor conference in September as a "massive" addressable market with about $30 trillion in investable assets. The deal will boost KKR's assets managed on behalf of insurance companies to "around $100 billion" from approximately $30 billion, he added.

Flatt estimated that insurance could become "a $100 billion-to-$200 billion business" for Brookfield over time.

In partnering with Brookfield, American Equity said it would gain "unique access" to the adviser's higher-returning alternative asset strategies. It is broadly seeking to boost its yield on new investments to more than 4%, from about 3.50% at present, through asset management joint ventures and partnerships.

To that same end, American Equity recently entered an agreement in principle for Värde Partners Inc. to establish a Bermuda reinsurance company to cover $5 billion of fixed index annuity liabilities and to jointly launch an entity to manage the new vehicle's assets.

The Brookfield deal contemplates the reinsurance of $5 billion of in-force fixed indexed annuity liabilities and at least $5 billion of future liabilities over a five-year period, each of which would be composed of American Equity's IncomeShield series and other similar products.

American Equity reported fixed indexed annuities with net account value of $51.12 billion as of June 30. It generated $1.06 billion in fixed index annuity deposits during the first half of 2020.