Anant Bhalla on the convergence of insurance, asset management

Anant Bhalla became chief executive of American Equity Investment Life (AEL) in March 2020, a turbulent time as COVID-19 was spreading around the world. When he joined AEL, which was founded in the mid-1990s and based in West Des Moines, Iowa, the company was the last big independent seller of fixed-indexed annuities in the United States. Its specialty is using its insurance and investment underwriting capabilities to promise customers the “dignity of a paycheck for life,” as Bhalla puts it.

During his CEO tenure, Bhalla fundamentally transformed the company’s business model, dubbing it “AEL 2.0.” That transformation ultimately culminated in AEL’s acquisition by Brookfield Reinsurance, which is part of Canadian investment firm Brookfield Asset Management. Brookfield manages more than $850 billion in assets.

The transaction, which closed this week, valued AEL at about $4.5 billion, representing a more than threefold increase from the time Bhalla took over as CEO. Along the way, Bhalla also fended off two unsolicited takeover attempts.

McKinsey senior partners Ramnath Balasubramanian and Fritz Nauck and McKinsey Global Publishing editorial director Mark Staples sat down for a conversation with Bhalla about his career path, AEL 2.0, his predictions for the insurance industry’s future, and more. An edited version of their conversation follows.

McKinsey: Anant, tell us about your background, your journey across the insurance industry, and how you came to be CEO of AEL.

Anant Bhalla: I started my career at American Express, where I worked for about eight years. I began in investments and then moved to the insurance division, which was spun off into what is now Ameriprise Financial. After I left Ameriprise, I had roles in finance and risk at Lincoln Financial and AIG. Then, I spent about six years between being CFO of the US businesses at MetLife and CFO of Brighthouse Financial, which was spun out of MetLife in 2017. I started my career on the left side of the balance sheet, which is investing, and then had to learn the right side of the balance sheet, which is deposits or, in the case of an insurance company, policyholder promises and capital. Over the course of my career, I have been involved in various M&A transactions as well.

McKinsey: Would you say that you’ve had more transactions experience than other executives?

Anant Bhalla: I’ve had my fair share of it, for two reasons. One is that businesses are in need of transformation, and therefore transactions are a galvanizing moment for being the agent of change in them. And two, I enjoy transactions: they allow you to be creative, to think like an industry outsider, and to uncover value.

McKinsey: You’ve been in the industry for over two decades, during which the industry has undergone many changes. What are the major trends you’ve seen affecting the sector?

Anant Bhalla: The insurance industry has experienced three major trends. The first trend is the significant unbundling of the insurance value chain in terms of distribution, insurance underwriting, and investment management.

The second trend is debanking, as banks have significantly pulled back from lending. That created an opportunity for the insurance industry, which had not globalized as much as banks. Even though there are a few global players, the regulation is all very local, so the capital to back insurers’ promises is ring-fenced in local jurisdictions. And that’s an advantage, because you can be a nimble player. Most insurers are not systemically important. That means you can take prudent, long-term risks by being both a lender and an owner of real assets, as opposed to banks, which at best are only short-term lenders, given their deposit funding. In a way, the industry’s gone back to how it was after World War II, when large insurers lent money to, and owned, projects such as infrastructure that helped transform the economy.

The third trend is that because of deglobalization and the need for more local investing in markets, it becomes easier for a business that’s sourcing its capital locally to also invest locally.

While banks got into the “risk transportation” business—taking the risks inherent in financial instruments and using securitization to pass them on to third parties in the capital markets—insurance companies have been in the “risk warehousing” business, retaining these risks on their balance sheets. How you prudently manage those risks became a constant part of my career and continues to remain a big imperative for the industry at large.

McKinsey: Tell us more about AEL’s business and the role its products play in the insurance industry and society.

Anant Bhalla: AEL has a very focused strategy: provide a promise, a savings product for people, and the dignity of a paycheck for life. Because there are no more defined-benefit plans that are growing; everyone’s in defined-contribution land. There’s no principal protection in a 401(k) plan—you can still lose your money. And there’s no guarantee that you’re not going to outlive your money as there is with having a paycheck for life: a simple promise.

Our core product is almost like a personal pension. Working through an intermediary like an adviser, we give a retail client a personal pension. Clients give us $100,000, and if they wait ten years, they can take out 10 or 12 percent for life, guaranteed.

McKinsey: You have called your company’s transformation “AEL 2.0.” Can you tell us more about it?

Anant Bhalla: AEL 2.0 is exemplified by a virtuous “flywheel” with the following parts:

  • annuity origination
  • differentiated investment management, with AEL taking a thematic view on where to allocate assets
  • third-party capital through reinsurance vehicles, to increase the capital available to deliver on our promises to policyholders
  • growth acceleration

We look at various private investments, without constraints, to find the best ideas that deliver a superior risk-adjusted return on assets. We structure these investments to fit the insurance balance sheet to deliver superior return on equity, accelerating growth.

We are an at-scale originator of long-term funding in the form of annuities policies through a range of distribution channels. We then invest this funding from our policyholders into differentiated investments and assets that align with the risks and duration of the policies. Then, we bring in new forms of capital to support these promises and generate additional revenue streams to effectively manage the capital on behalf of investors. The financial objectives of our AEL 2.0 strategy are to decouple our business model as much as possible from interest rates, generate a steadier stream of fee-based income, and increase the overall returns on equity we deploy.

McKinsey: Let’s start with the origination part of the flywheel. During your tenure, AEL has experienced significant growth in originating new annuities. Tell us more about what you have done there.

Anant Bhalla: When I took over running the company in early 2020, we were originating $2.3 billion in new fixed-income annuities a year. In 2023, we have done over $7 billion in new annuity origination—that’s $7 billion in new promises. Historically, we were largely a single-channel company; we worked with independent agents. We’ve gone deeper into banks and, more importantly, independent broker–dealers. What I’m most proud of is not just the $7 billion number but the fact that $5 billion of that total is income annuities—these personal pensions.

We got independent broker–dealers to buy into the fact that, as part of financial planning, you have to provide people with a decumulation option or a means of converting their nest eggs into retirement income. Not just an accumulation option but a decumulation option that’s guaranteed. In 2019, the year before I took over, AEL had slipped to number ten among US annuity companies by annual sales. In 2023, we were a top three carrier. But when it comes to income annuities, we are number one as of the fourth quarter of 2023, up from number 13 in the first quarter of 2020. The reason we value that a lot is that the business model we’ve constructed on the assets and liabilities side was “real promises, real assets.” We are weighted more toward the real assets, which, in our view, deliver more resilient profitability.

McKinsey: That’s a nice segue into the next part of your flywheel: investing in assets in a differentiated manner. What have you done there?

Anant Bhalla: We have the long-dated funding, or what we call the promises. How do we find the right assets whereby we can effectively match the duration of these promises while providing better returns to our policyholders to enable them to have the dignity of a paycheck for life? We saw a big opportunity to shift to differentiated private assets that fit the profile of our balance sheet. We have a very expansive definition of private assets—to provide a few examples, this includes investing across the capital structure, from loans to asset ownership in two areas: real assets and private credit. Real assets include infrastructure like pipelines, ports, rental real estate, hotels, data centers, and warehouses. Private credit means lending to midsize companies with tight covenant protections in Main Street businesses, secured and unsecured consumer lending, working-capital finance, or asset-backed finance, all areas where the debanking trend is our friend.

Today, we have nearly a quarter of our total portfolio, or about $15 billion, invested in a range of private assets, up from a fairly insignificant share of our asset allocation before I became CEO. We will continue to judiciously increase this allocation.

McKinsey: There are concerns about the trend of private assets on insurance balance sheets. They’re seen as riskier, and there are also reputational concerns. What’s your perspective, and what have you been doing differently?

Anant Bhalla: The criticism and concerns are very fair and justified in some respects. In the early 2000s, the insurance industry was an asset allocator and not an investment underwriter. In addition, chief investment officers at insurance companies largely limited themselves to publicly traded securities. The strategic mistake was to not see the huge value in funding from the policyholders, funding that could have allowed insurers to pivot toward private assets sooner.

Since the 1990s, there has been a significant increase in the supply of available securitized investments in the industry. Someone makes a loan and sells it to an intermediary that pools loans and structures them into various tranches. They convert a plain-vanilla BBB loan into multiple tranches of AAA, AA, A, BBB–, and then some Bs and an equity component as well. The senior-most tranches are perceived to be the safest, and they end up with investors, including insurers. There’s a global glut in savings. That translates into huge demand for more and more of the same paper, which is perceived to be high quality. The problem is that as insurers and others crowd into this paper, the price goes up, and there isn’t enough return to make the guarantees an insurer offers.

By the end of the last decade, the amount of cushion underneath you to absorb the loss of principal in BBB investment-grade public securities was about 10 percent. The view that we had, and the alternative managers who got into insurance had as well, was that if, as an insurer, you rely on the ratings of publicly available bonds and there’s too much demand for these and spreads are compressed, it’s not worth the risk. Owning any BBB piece of paper—whether it is CLO, CMBS, RMBS, or even pure corporate bonds—does not provide enough cushion underneath you. Conversely, there is much more of a cushion in private-credit assets. It was riskier for an insurer to own unsecured public bonds from large corporations than secured debt against real collateral from midsize companies and consumers. Traditional insurers missed an opportunity as they piled into the perceived safety of public bonds from the 1990s to the 2010s.

McKinsey: What you’re describing sounds like a different approach. You are focusing partly on hard-to-originate assets that require strong expertise and diligence in terms of how you underwrite. Can you tell us more about what you have done there?

Anant Bhalla: We decided to go back to the basics. That meant becoming a real underwriter for assets whose risks we understand well and can manage effectively, rather than relying on assets and ratings originated by someone else. That involved being willing to do the work at each asset level, expending the shoe leather to actively manage these assets.

First, underwrite so that you buy right, with strong legal protections. If you look at CLOs, many of the underlying leveraged loans have no documentation. If you look at public corporate bonds, they’re unsecured. Insurers need to get secure credit where you have covenants, where you track these companies monthly on KPIs so that before they go bad, you can jump in and talk to management.

Second, monitor the assets in real time so you can manage them before they go bad. And when they do go bad, work them out. Don’t be at the back of the line in court to get a recovery but be part of the recovery.

The other part is real assets. We’re making an annuity promise. What is better to back a paycheck for life, which is to be collected over 20-plus years, than an asset like a port? Or a pipeline? Or a hotel that’s a new development but has a great return? Or a portfolio of rental homes? AEL is a landlord on a portfolio of hundreds of homes spread across the Southeast of America. Because there’s a trend of migration to the Southeast, there’s a demand for rental housing.

We challenge the existing paradigm. We are focused on hard-to-originate assets, bringing real expertise, a real focus on burning the shoe leather, and real diligence in terms of how we underwrite these assets, as well as how we monitor them. It’s hard work; it’s not easy to pull this off. Our business is about “real promises, real assets,” and we are investing in real assets for sustainable returns, not a financially engineered tranche.

If you go back to insurance regulation, it envisioned insurer support for agriculture, real estate, infrastructure, and lending to businesses and consumers. We really didn’t reinvent the wheel. I keep telling people, AEL stayed in America and went “back to the future.” We worked with regulators and brought an integrative way of managing the two sides of the balance sheet together, the asset side and the liability side, compounding returns for our capital.

McKinsey: Tell us about the next part of the flywheel: third-party capital. What is AEL doing to raise capital, and how does it differ from the traditional insurance playbook?

Anant Bhalla: The traditional insurance model would be, you originate the liabilities, invest all those assets from your balance sheet, and hold all the capital against that on your balance sheet.

When I took over running AEL, we had $3 billion in capital and $50 billion in promises, so we were levered like 17 to one. The first thing we did was to delever the company by raising $1 billion in capital, so we went up to $4 billion. After that, we brought in additional capital to expand the balance sheet in a capital-light manner for our shareholders, through reinsurance structures.

For a public insurance company, it’s not that easy to raise capital from public-market investors who have opportunities to invest in, say, growth stocks, tech stocks, etcetera. The way to go about it is that as we grow our business, if we need an additional $3 billion to $4 billion of capital to reach nearly $100 billion in assets by the end of the decade, $1 billion can be contributed by the company and the remainder would come from third-party investors. The structure is that they’re not investing in a public company; they’re investing in a separate vehicle to which we transfer the balance sheet. While AEL is still responsible for managing that separate company and is providing all the services, it remains separate. It’s a public–private structure.

Essentially, we attracted third-party capital to co-invest in mini-clones of AEL, whereby the third parties could get a little share of this big company themselves through reinsurance. Reinsurance was just a risk transfer vessel by which we could attract folks to own mini-portions of AEL so that AEL would be more valuable as a public company. We earn fees for managing those private mini-clones of AEL, and this revenue stream is more capital efficient and helpful for increasing our returns on equity, thereby increasing the franchise value of AEL.

McKinsey: And now AEL has gone totally private with the acquisition by Brookfield.

Anant Bhalla: Yes, Brookfield’s transaction is great for shareholders because we unlocked a lot of the value of AEL 2.0 by matching up the two sides of the balance sheet and transforming a quarter of the liabilities into fee-generating liabilities. Our overall return on equity has increased. Brookfield is a great natural owner as it’s very good at real assets. Aligning a real promise originator of funding with a real-asset manager is a very strong point. Brookfield has adopted AEL 2.0 for itself. If you look at asset management and insurance coming together, two industries at a crossroads, they’re really two industries that have merged into each other. Why? Because the benefit of having long-term funding for an asset manager is to be able to invest for decades.

McKinsey: Let’s talk about the future of these two industries—asset management and insurance—which have been coming increasingly closer. How do you see the convergence developing?

Anant Bhalla: There are two clear models. In the first model, the asset manager is embedded within the insurer, and the goal is compounding capital at 12 to 15 percent a year for many decades, delivering multiples of invested capital. The second model involves a “captive” insurer affiliated with asset managers that focus on the fee-generation potential from the permanent insurance asset base.

Additionally, the debanking trend means that private alternative-asset management is here to stay, so you’ve got a parallel industry, which is private credit. And private credit is not just lending. There’s consumer and specialty finance in there; it’s become mainstream financing. But for private credit to be a sustainable business in the long term, it needs stable funding. Insurance and private credit fit together. Debanking has created a need: economies don’t recover without credit. If banks retrench from lending, someone is going to fill the void. Who better than another regulated industry like insurance? It’s better for the economy when insurance and private credit come together in a responsible manner.

McKinsey: What’s next for you?

Anant Bhalla: I will be launching a new venture that will be a principal investor using its own insurance balance sheet and an asset manager to improve its return on assets in the most compelling macro themes, and structuring assets to deliver superior return on equity.

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