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Pedestrians and office workers walk past the Bay St. entrance to Brookfield Place in Toronto’s Financial District on July 12, 2022.Fred Lum/the Globe and Mail

One of the cornerstones of Brookfield Corp.’s BN-T plan to boost its earnings over the next five years is a business that barely existed for the company three years ago: Its fast-growing insurance arm.

What started as a small business allowing pension plans to transfer risk for future liabilities, and a virtual rounding error on Brookfield’s vast balance sheet as recently as 2020, is soon expected to reach US$100-billion in assets under management, then balloon to US$250-billion by 2028.

“We have lofty ambitions,” said Sachin Shah, chief executive officer of Brookfield’s insurance arm, in an interview. “It could be a very sizable part of the overall franchise.”

The business Brookfield set out to build three years ago is designed to be sleepy and steady. Through Brookfield Reinsurance Ltd. BNRE-T, the publicly listed subsidiary that holds its insurance assets and operating companies, it mostly offers predictable income to retirees, insurance to other insurers and other types of plain-vanilla life and casualty policies.

Brookfield is deliberately keeping its exposure to property insurance small, as liabilities from severe weather events and natural disasters such as wildfires and floods have become increasingly unpredictable.

Instead, its core product is annuities with fixed interest rates – a kind of insurance that converts a lump-sum premium into a promise of regular payments with interest over a period of time.

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It is a far cry from the prestige of owning gleaming office towers in large cities, the high-stakes deal making of private equity or the global urgency to build new renewable energy sources, where Brookfield is already well established.

But the popularity of annuities has spiked, first as upheaval from the COVID-19 pandemic created a larger appetite for predictable income, and then as rising interest rates made the returns offered on the products more attractive.

In the span of a few years, insurance has become one of three pillars of Brookfield’s strategy, along with its established, US$865-billion asset-management arm and a growing private wealth business forged through its 2019 purchase of a majority stake in Oaktree Capital Group LLC.

Over the next five years, Brookfield’s insurance-solutions business is expected to account for more than a third of the company’s forecast rise in annual distributable earnings – a cash-like measure of profits that could be paid out to shareholders – from US$4.5-billion to US$13.6-billion. By 2030, Brookfield projects it will earn more than US$5-billion in distributable earnings from insurance alone.

Though Brookfield has managed investments for insurance companies for years, it is betting that it can generate higher returns and better manage risks as an owner, loosely following a playbook set out by U.S.-based rivals such as Apollo Global Management Inc., Blackstone Inc. and KKR & Co. Each has snapped up life and annuity insurers in pursuit of new streams of assets that pay predictable fees, which serve as a counterweight against more volatile returns from private equity or real estate.

“What we all realized is that our investment capabilities were really well suited to providing good assets that match up really nicely to insurance liabilities,” Mr. Shah said. “Yes, we could just manage the assets. … But if we could put our own equity into these businesses and invest in them in the future, we could make them very competitive, we could offer many more products to policyholders.”

The basic premise of Brookfield’s strategy is to amass a pool of simple liabilities by owning insurers that write annuities and other low-risk insurance products. Brookfield can then invest 30 to 40 per cent of the money those insurers collect from policyholders into Brookfield’s funds, mostly in private credit but also other assets such as real estate or infrastructure, and keep the rest in cash and liquid securities.

Current annuity policies pay an average rate of about 4 per cent, and if Brookfield meets its target return of 6 per cent, it can collect the difference while its asset-management arm earns a reliable stream of fees for managing the money.

Brookfield executives are surprised by how fast it has built its insurance beachhead, spending US$10-billion of its own capital on a string of acquisitions to muscle into a highly regulated industry.

But the rush of investment from large stewards of private capital also highlights some potential pitfalls. Stiff competition is driving up annuity rates, and as interest rates have shot up, market returns have been volatile.

“To try to build stability in that environment is just challenging,” Mr. Shah said.

Most importantly, Brookfield has to persuade regulators and ratings agencies that it has the long-term interests of insurance clients at heart. Some private equity firms that expanded into insurance have drawn criticism for appearing to chase short-term profits at the expense of policyholders.

In an effort to sidestep those concerns, Brookfield is making the case that it is investing its own money to build an insurance franchise with a long-term outlook that doesn’t rely on money from outside investors who are looking for quick profits.

“Having used 100 per cent of our own equity capital to both start this business and grow … we’re never going to compromise on risk in order to drive fees or to drive some other objective, because it’s all of our capital that we’ve put at stake,” Mr. Shah said.

Last week, Brookfield closed a US$1.1-billion deal to buy Argo Group International Holdings, Ltd., a specialty insurer that provides casualty insurance to cover employers’ liabilities. And it is awaiting final approvals for its US$4.3-billion acquisition of Iowa-based annuity provider American Equity Investment Life Holding Co. (AEL), a prize it wrestled away from rivals including Apollo-owned insurer Athene, which made an unsuccessful competing bid.

The closing of that deal will push Brookfield’s insurance assets under management above US$100-billion, from US$50-billion currently, marking a milestone in a business plan Brookfield hatched a few years ago at a moment of instability and low interest rates.

The first signal of Brookfield’s ambitions came in late 2020 when it agreed to acquire a 19.9-per-cent ownership stake in AEL, and to reinsure up to US$10-billion of its products. That set the stage for Brookfield to establish itself as a regulated insurance provider by buying American National Group, Inc., a broad-based insurer headquartered in Texas, for US$5.1-billion.

The timing was no accident: After interest rates plunged as the world battled early waves of COVID-19, Brookfield executives saw an opportunity that offered more upside than risk.

Life and annuity insurers’ large portfolios of liabilities to clients, which typically stretch out seven to 10 years, were largely locked in at low interest rates that couldn’t fall much lower. And many of the assets that insurers were investing to meet those liabilities were set to turn over faster, about every four years.

If interest rates rose to more normal levels, the company could reinvest the assets to earn higher returns, while its liabilities remained fixed – and no one at Brookfield predicted how fast central banks would ratchet rates higher to beat back soaring inflation.

Assuming its acquisition of AEL closes, Brookfield will have the ability to write US$10-billion to US$12-billion of annuities annually, and Mr. Shah hopes to boost that capacity to US$20-billion in the coming years.

Its insurance business is heavily concentrated in the U.S., with a small presence in Canada, and could expand over time to Britain, Europe or Asia, en route to Brookfield’s eventual goal of managing US$500-billion of insurance assets, as outlined in a recent presentation to investors.

Brookfield on path to boost earnings with fast-growing insurance arm
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