Originally published in Nikkei Asia's “Henry Kravis: My Personal History"
Chapter 20
Insurance emerges into dynamic asset class
Japan has one of the largest and fastest-aging populations. It is also contending with several factors, including its exit from more than two decades of deflation and how most of Japan's financial assets today are held in low-yielding deposits. As Japan's aging population continues to grow and the country shifts toward more sustainable inflation, helping individuals grow their retirement income will become a huge national priority.
Insurance is an area in Japan where we have been working closely with storied institutions like Japan Post Insurance and Manulife Japan to provide reinsurance and advanced asset management solutions across asset classes. We are also working with local institutions to provide different offerings to corporate pensions.
It is also helpful to understand the role insurance plays. Four plus decades ago, insurance was viewed largely as a necessary but somewhat conservative component of the financial world -- a means to manage risk, safeguard against loss and provide a safety net in times of crisis. It was a cornerstone of financial stability, yet not the most glamorous or exciting aspect of finance.
Back then, few could have imagined that, in addition to serving a key societal need, insurance would evolve into a dynamic asset class in its own right, attracting a wide array of investors and playing a pivotal role in the global financial landscape.
In the early days, insurance was primarily the domain of traditional firms focused on underwriting and claims management. The opportunities for growth were limited to geographic expansion and the development of new insurance products. However, as the financial markets evolved, so too did the perception of insurance. The market for reinsurance grew steadily as insurance pricing structures evolved and regulatory capital requirements increased over the past 50 years. This ushered in a new era of appreciation for reinsurance as a tool for managing the insurance industry's risk, capital and strategic goals.
Reinsurance provides the industry with capital to continue to meet the societal need of offering insurance products that fill the protection gap by converting accumulated savings into predictable, protected lifetime income. The industry also began to recognize that insurance was not just about managing risk but could also be an investment vehicle, much like other asset classes. This realization marked the beginning of a significant industry transformation.
Insurance companies have played a crucial role as investors in KKR's funds since the 1970s and represent one of the largest client segments for firms like ours today. At its core, the life and retirement insurance industry operates on a simple yet powerful model -- originating low-cost, predictable liabilities such as annuities and matching them with high-quality, long-term assets. When executed effectively, this model generates a positive return, or net spread.
This model has helped insurers provide financial security to retirees and finance some of the most iconic businesses and landmarks in the world, including the Empire State Building and McDonald's.
However, meeting the asset side of this equation has proved challenging for insurers, which have struggled to satisfy rising demand for retirement products globally while facing difficulty raising capital in public markets and low returns from traditional investments. This has led to a proliferation of strategic partnerships between insurers and asset managers.
These partnerships allow insurers to source the high-quality assets needed to match their long-term liabilities at attractive economies of scale and provide asset managers with access to long-term capital and the opportunity to scale businesses that align well with insurance capital, such as credit and real estate investments. These relationships are subject to strong governance, regulatory and ratings agency oversight.
A prime example of this synergy is KKR's acquisition of Global Atlantic in 2021. Since announcing the acquisition in July 2020, Global Atlantic's assets under management have more than doubled, annual asset originations have grown significantly -- from $17 billion to $36 billion. We have also raised more than $3.5 billion in capital through our reinsurance co-investment vehicles, which we believe are becoming increasingly attractive to Limited Partners at a time when demand for reinsurance is on the rise globally. This has enabled us to more effectively meet the reinsurance needs of our clients in the U.S. and more recently in Japan.
The Japanese insurance market shares many similarities with the U.S., particularly in the growing need for retirement products and the challenges posed by low interest rates. Japan's insurance industry, which includes the second-largest savings and annuities market globally, is at a critical juncture. While annuity sales and reinsurance activity in Japan are currently much smaller compared to the U.S., there is significant potential to support individuals seeking to invest their savings in relatively low-risk products, such as annuities.
Additionally, Japanese insurance companies are increasingly looking for partners who can help them unlock capital and reinvest funds into their businesses. As Japan prepares to modernize its solvency regime and implement new economic value-based solvency regulations by 2025, effective capital management will become even more critical. Just as in the U.S. and other markets, growing liabilities will continue to strain Japanese insurers' business models, driving them to diversify and seek alternative sources of capital.
The strategic deployment of insurance capital in Japan not only holds the potential to address the immediate financial challenges posed by an aging society but also positions insurers as key players in the country's economic future. By evolving from mere risk managers to proactive investors, Japan's insurance companies can contribute significantly to the nation's long-term prosperity.