Brookfield Asset Management launches reinsurer targeting annuity premium float

Brookfield Asset Management Inc., the giant Canadian headquartered alternative asset manager that has around $575 billion of assets under management, is expanding in the reinsurance space with an annuities strategy through which it expects to secure up to $10 billion of additional float at the start.

Brookfield is just the latest of the very large global alternative asset managers to increasingly look to reinsurance, in particular the life and annuities reinsurance space, as an attractive market to secure long-term capital from, while also earning underwriting income and fees.

Brookfield joins players such as Apollo Global Management and KKR & Co. LLP, both significant asset managers that have demonstrated their liking for the way reinsurance premium assets can be both source of income, as well as long-term firepower for their other investment strategies and are growing their operations in this sector.

Brookfield is launching a Bermuda based reinsurance entity named Brookfield Asset Management Reinsurance Partners, or BAM Reinsurance for short.

BAM Reinsurance is being established with a special dividend in the form of what Brookfield calls a paired entity, which will be worth roughly $500 million, or approximately 33 cents per share of Brookfield Asset Management.

BAM Reinsurance will be the main entity that Brookfield conducts reinsurance activities through, allowing the firm to grow its reinsurance business in what it calls “the most efficient fashion”.

It’s also a way to allow shareholders to participate in Brookfield returns in a different way, with the investment giant noting that holding Brookfield through the Bermuda reinsurance entity “should be more attractive to some groups of shareholders.”

The idea is that BAN Reinsurance trades at similar economic levels to Brookfield, providing an alternative route to access the returns of Brookfield’s investment prowess through a reinsurance structure.

“BAM Reinsurance is intended to provide our shareholders with a choice of holding either shares of Brookfield or the new shares of BAM Reinsurance, depending on what is most attractive to them based on their own circumstances,” explained Nick Goodman, Chief Financial Officer of Brookfield. “The very positive market reception, including in the case of the most recent listing of Brookfield Renewable Corporation, has encouraged us to offer a similar structure for our own shareholders, enhancing shareholders’ ability to meet their own financial planning objectives, while also facilitating the growth of our overall organization.”

But while the routing of the investment may prove advantageous to some, there’s more to the strategy than just providing an offshore routing to access Brookfield’s overall asset management return generation.

Writing to shareholders in his Q3 2020 letter, Bruce Flatt, Chief Executive Officer of Brookfield Asset Management explained that reinsurance is an area of growth opportunity for the asset manager.

As with all moves made by significant assets managers, there tends to be both elements of opportunism as well as timing and that’s certainly the case here.

Flatt explained, “At various points over the past decade, we have considered expanding our asset management business to include reinsuring obligations related to long-term annuities, as the capital is of long duration and our investing skills can add value in the investing of the capital. We previously had two misgivings: the first was our strong belief that interest rates might decline, which made it unattractive to lock in long-dated liabilities at high interest rates. The second was the fact that much of the capital from reinsurance activities would need to be invested in credit instruments, and we were concerned that our credit platform was not sufficiently large to take on the scale of capital involved.

“Fast forward to 2020: interest rates globally have dropped to near zero, and while rates could go negative, in our view the odds do not favor that for any significant length of time. As a result, we believe the risk involved in reinsuring long-tail liabilities is the lowest it has ever been.”

Brookfield had recently announced an arrangement with American Equity Investment Life Holding Company, with the pair entering into a strategic partnership that would see Brookfield reinsuring $5 billion of existing liabilities and up to an incremental $5 billion of new sales of American Equity’s IncomeShield or similar fixed index annuity products.

Hence the setting up of BAM Reinsurance in Bermuda to support this and become a platform for expansion into this annuities reinsurance marketplace.

Flatt explained what that means to BAM, “The simple story is that we will receive up to $10 billion of cash, invest those funds in our alternatives and income-oriented investment strategies and, if we can out-earn the rates we pay on the liabilities, we will do very well.”

With the liabilities from these large annuity reinsurance books seen at their lowest ever, while returns on the investment side may be volatile but are very good in some areas of the investment markets, Brookfield is displaying an appetite for float accumulation and almost a total-return type approach, at the least an investment-oriented reinsurance approach.

It could be that there’s a bit of an arbitrage opportunity emerging in this marketplace for large bulk annuity reinsurance and other life related deals, where by the liabilities carry such low risk and the assets such long-term tenure, that the investment returns can more easily support the business and a profit, making the premium float even more attractive to source and hold for firms like Brookfield.

Meaning that when the annuities book also delivers insurance-linked profits, the investors backing Brookfield and its reinsurance entity can do very well, with a relatively uncorrelated insurance-linked return to add to the alternative investment performance.

Investment firms of scale, like the Brookfields, Apollo’s and KKR’s of this world, can enter this market with relatively low-friction, make it attractive to third-party investors through smart structuring of entities and then deliver assets to their own strategies, giving them more firepower, as well as profits to their shareholders.

Right now it seems a win-win for these giant asset managers and it will be interesting to see how innovative they can get in ways to bring more third-party capital in to support this float accumulation strategy.

As we’ve already seen, with Athene and its ACRA and Global Atlantic with Ivy Re, sidecar structures for bringing additional third-party capital firepower into large life and annuity reinsurance deals are a great way to bring extra investor capital along for the ride, while enabling them to do even larger deals, accumulating even more float on the back of end-investors allocations.

Of course, we’ve also seen the setting up of Langhorne Re, by Reinsurance Group of America with management support from RenaissanceRe, also targeting the large life and annuities reinsurance space using third-party capital.

This is developing into a fascinating marketplace and one that is sure to attract more large investors over the coming years.