Ananat Bhalla and McKinsey: Insurance, Asset Management
In a recent discussion with McKinsey, Anant Bhalla, former CEO of American Equity Investment Life, offered insights into significant trends and predictions that could shape the future of these sectors.
Key Insights
Industry Convergence: Bhalla discussed the ongoing convergence between insurance and asset management, noting how this trend reshapes how companies operate and interact with their customers. This convergence is largely driven by the need to manage risks more effectively and leverage assets for better financial outcomes. He believes there are two clear models for the convergence of the asset management and insurance:
He says: “In the first model, the asset manager is embedded within the insurer, and the goal is compounding capital at 12 to 15% 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.
He goes on: “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.”
Trends in Asset Management: The asset management industry is undergoing significant changes with a shift towards passive funds and an increase in unmanaged assets. European asset managers, in particular, are facing challenges related to profit contraction amid these shifts.
Trends in Insurance: Anant Bhalla states that the insurance industry has experienced three major trends.
He says: “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 globalised 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 deglobalisation 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 securitisation 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.”
Anant Bhalla and American Equity Investment Life
Anant Bhalla took on the role of CEO at American Equity Investment Life (AEL) in March 2020, during the global outbreak of COVID-19. At that time, AEL was an independent provider of fixed-indexed annuities in the U.S., headquartered in West Des Moines, Iowa. The company was known for its insurance and investment underwriting expertise, which it leveraged to offer clients secure, lifelong income options, a concept Bhalla described as the "dignity of a paycheck for life."
Under Bhalla's leadership, AEL underwent a significant strategic overhaul that he termed "AEL 2.0." The transformation ultimately led to the company's acquisition by Brookfield Reinsurance, a division of the Canadian conglomerate Brookfield Asset Management, which controls assets exceeding US$850bn. The acquisition, finalised recently, valued AEL at approximately $4.5 billion, a valuation more than triple what it was when Bhalla assumed leadership.
During his tenure, Bhalla also successfully resisted two unsolicited attempts to take over the company.
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