11 September 2023

Brookfield and insurance: a defence

Brookfield has been looking to carve out a name for itself in the insurance world. Even as the company gets assailed by a critics its path to growth remains undimmed.

All finance shops need help. Brookfield is no different. Despite its undoubted clout in the asset management world, the last few years have seen the asset manager ramp up its expertise by hiring some of the biggest names in finance. Lending his heft to the company's transition investing work is asset management chair Mark Carney, ex-governor of the Bank of England, and now advocate for sustainability in his role as co-chair for the Glasgow Finance Alliance for Net Zero.

On the insurance side, Brookfield brought in equally weighty backing in the form of Michael McRaith, vice chair of insurance solutions, from Blackstone in 2021.
It was a canny appointment given McRaith's background. Before Blackstone, McRaith served for nearly six years as the first director of the US Treasury's Federal Insurance Office, prior to which he had a six-year stint as director of the Illinois Department of Insurance. He is also, by training, a lawyer.

McRaith gives a robust defence of the company's business model and its reasons for moving into insurance.

"Our strategy is not just managing assets," he says. "It's not just putting in other Brookfield strategies—our parallel aspiration is to build successful operating companies."

It is an ambition that has led the manager to hire 50 or so people from some of the top insurance companies in the US to bolster its expertise.

Brookfield's influence

The help may be needed given the vitriol that many outsiders have directed towards asset management involvement in insurance. For Brookfield, one voice has shown a particular vexedness with the company's involvement in insurance.

Trade union, Unite Here seems to have something of a vendetta against Brookfield (see part I here). It began with a broadside on its use of policyholder funds to invest in "risky assets" following the manager's takeover of American National. Last month, the attacks stepped up another level when Unite Here established a website entirely dedicated to what it calls a "resource for regulators, members of the public, and other stakeholders who may be concerned about the dozens of headlines affiliates of Brookfield have garnered this year about defaults, debt downgrades, and other commercial real estate distress."

Michael McRaithMcRaith, who certainly knows his way around the industry, has experience in batting away these kinds of things. For example, on the suggestion that Brookfield chose to sell its entire bond portfolio, he says:

"We didn't put a $2bn bond portfolio for sale. If it were true, I would agree it is something you should be interested in. It just happens to be not true."

Sachin Shah, chief executive of Brookfield Insurance Solutions, and McRaith are firm in their rebuttal of Unite Here's claims, but they remain keener to shift the focus away from the accusations and emphasise the risk-return fillip that the Brookfield tie-up has given American National.

For example, there is the fact that by aggressively investing in short-dated treasuries the insurer was able to pick up 400 to 500 basis points of value that has seen the weighted average ratings of the investment book today move up to triple B, a notch higher than it was when it inherited the business.

"We've picked up value and we have a higher investment income return then previously and have reduced market equity risks," McRaith says.

And far from breaking with the past, the company's takeover and associated asset rebalancing is being carried out by American National's long-time chief investment officer, Janet Glickman—with the support of Brookfield Reinsurance's investment advisory group—who has remained in her role post-merger keeping the same team as before.

Meanwhile, the company now has more liquidity, is at least as highly rated on an NAIC and credit rating agency basis as it was before as well as getting the aforementioned return uplift.

Yet the accusations on its negative influence over policyholder money persist. So are some people just out to get alternative investment managers?

McRaith accedes that there may be room for wariness about the broader PE involvement in insurance. Not every company owner is going to operate with the same degree of integrity and transparency as his own. Naming no names, but clearly a few examples of less salubrious dealings come to mind, the outcry from politicians may be justified in some cases.

For most of these alternative asset manager-owned insurance companies, the business model is dependent upon the parent firm.

"As long as we are maintaining sufficient liquidity, which we do, as long as the overall credit worthiness of the portfolio is at an appropriate level, which it is for American National, that is our target," McRaith says.

Addressing another of the claims by Unite Here—that Brookfield is looking to switch the insurer portfolio into risky private assets—that may, indeed, be levelled against the entire insurance industry. While there is more private credit in-built into the Brookfield business model, there is more private credit across the insurance sector. Above everything, McRaith says he holds faith in the power of regulations and regulators to do their job in monitoring such entities as his own.

"We wouldn't be doing these things if we were not having the fully transparent engagement with the regulators, and if they weren't giving us feedback. And that is true in every state in the country."

Third party vs in-house

Sachin ShahBut over the union attacks, there are other issues. For one, Brookfield now has two camps to run with its insurance subsidiaries and third-party client assets. Might the former get increased attention over the other? And what are the investment goals of the two?

"The differences are really around what the third-party insurer is trying to achieve—sometimes we get a very specific strategy they asked for," Shah says. "Sometimes they want highly rated infrastructure debt, and therefore we work with each counterparty to customise what they're looking for. Some counterparties just say, please invest, as you see fit under this broad mandate."

The strategies are not high risk, Shah says, emphasizing the points he made in the previous interview. The company invests in infrastructure products, real estate products, renewable power products, credit products—all pretty standard stuff for insurers and done across both sides.

"We are not investing our capital and their capital differently in that regard," he says. "The control is set on the basis that we are an LP in our funds, no different than any other LP. We pay the same fees. We invest in the exact same underlying investment products. We have the same exact targeted returns. We don't have criteria for ourselves that are different than another third party LP. We're afforded the exact same protections."

With the other two insurers, Argo and American Equity, set to join Brookfield's insurance fold this year, work is getting even busier for the insurance arm. Fortunately, Shah has the legion of insurance experts to draw on as well as the parent's asset specialisation. It will be needed for the company's adventure ahead.

"We don't care about the next quarter, we care about the next 10 years," Shah says. "Let's start to build the investment plan around 10 years, not three months. That [approach] has been really helpful."

So Brookfield has set its stall out to focus on the long game. One wonders if Unite Here may respond?