RiskMay 24, 2023

Union Warns Pension Funds to Be Wary of Private Equity-Backed PRT Insurers

UNITE HERE singles out Brookfield-owned American National Insurance Company as using risky strategies.

Reported by Michael Katz

A U.S.-Canadian labor union warned hundreds of defined benefit pension plans of potential risks involved with conducting pension risk transfer deals with private equity-backed insurers.

Hospitality workers’ union UNITE HERE, which represents 300,000 workers, sent to several hundred pension plan administrators and actuaries a letter that singled out Galveston, Texas-based American National Insurance Co., which is owned by Brookfield Reinsurance Ltd., an affiliate of Canadian alternative asset manager Brookfield Corp. According to the letter, Brookfield’s strategy incorporates acquiring blocks of annuities and group annuities and then replacing a portion of the safest assets with complex or illiquid investments such as private loans.

The union letter claimed Brookfield’s focus will be originating or acquiring private loans intended for American National Insurance’s portfolio, where they do not need to be during short-lived downturns. However, it added that what might happen to the private-debt assets during long downturns or permanent credit impairments is far less clear.

“In our view, pension obligations should not be used as a cheap funding source for private equity asset managers chasing the illiquidity premium or offloading illiquid assets their own affiliates have originated,” the letter stated. “Unless and until there is updated guidance from the [Department of Labor], plan fiduciaries must navigate the new developments in PRT themselves.”

But American National Insurance disputes claims that there are liquidity issues with its practices.

“Like all insurance companies, American National and the group annuity product used for pension risk transfers are highly regulated and we maintain high levels of liquidity,” American National Insurance Senior Vice President Scott Campbell said in an emailed statement. “Brookfield has a lengthy history as an owner and operator of real assets and businesses. Their long-term investment approach is aligned with the long-term nature of pension risk transfer insurance contracts.”

The union urged pension funds to carefully review the investment practices of prospective group annuity providers, including the degree to which they use affiliated offshore reinsurance and their track record as risk managers of long-duration liabilities. It noted that regulators “have turned their attention to the risks inherent in private equity-backed insurers” and cited the U.S. Department of the Treasury as saying that the growth of alternative and non-traditional investments in the insurance sector may be associated with the potential amplification and migration of risk in at least five ways:

Regulatory incentives may help drive private equity-owned insurers to incorporate substantial reliance on offshore risk-bearing entities, potentially masking the degree of risk to U.S. policyholders.
The increased interconnectivity of the U.S. and Bermuda insurance markets through the growth of private equity-owned insurers may have implications for U.S. policyholders.
The increased use of complex investment strategies has led to the greater prominence of illiquid and volatile assets on insurers’ books.
Firms may be leveraging opportunities for capital arbitrage that may exist because regulators and the NAIC have not fully aligned supervisory frameworks with market developments.
Alternative asset managers and private equity-owned insurers have access to diversified channels to source private credit, enabling them to engage in more complicated transactions.

The letter cited public filings, earnings calls and statements from Brookfield executives that indicate that since it acquired American National Insurance, the company has moved to replace bonds and other liquid securities with private credit, asset-backed securities and other alternative investments. The union also stated that shortly after the acquisition was approved by regulators, American National Insurance placed its entire $13 billion bond portfolio as “available for sale.”

In Brookfield’s 2022 earnings report, the company announced it closed 28 pension risk transfer deals last year, which was “our most active year to date,” representing $1.6 billion of premiums, a 50% increase over the previous year. That total included its first PRT transaction in the U.S. market, “where we expect to continue to be active in 2023.”