The Canada Pension Plan Investment Board blazed into the U.S. life insurance sector Friday with the purchase of Bermuda-based insurance solutions company Wilton Re Holdings Ltd. for $1.8-billion (U.S.), a company it intends to use as a vehicle for growth in the market.
The fund was attracted to the life insurance business south of the border because of its capacity to "generate cash flow over multiple decades." At the same time, CPPIB will invest capital to expand the company.
CPPIB isn't alone is seeing the appeal of the insurance sector, and its strategy shares some similarities with investment companies such as Warren Buffett's Berkshire Hathaway, which has become known for its profitable insurance businesses such as Geico Insurance.
In Warren Buffett's most recent letter to shareholders he explained the benefit of having a large cash float from premiums collected in property and casualty insurance businesses. The float is"money that doesn't belong to us but that we can invest for Berkshire's benefit," he wrote. The float climbed to $77-billion in 2013, from $39-million (U.S.) back in 1970. The company gets a second benefit from underwriting profits.
Prem Watsa's investment company Fairfax Financial Holding Ltd. is also a big U.S. insurance provider through businesses such as New Jersey-based property and casualty (P&C) insurer Crum & Forster Holdings Corp.
For CPPIB, though, the attraction was in the closed books of life insurance that Wilton Re buys up – essentially they are policies that aren't sold any longer, but are still on insurers books and still collect premiums. Wilton Re has been a leading acquirer in the space.
These closed-book policies are relatively stable investments, which don't move with the markets. "I'm not writing off potential acquisitions on the P&C side, but I think as a first acquisition the low volatility and predictability of the life sector was attractive to us," said André Bourbonnais, senior vice-president of private investments at CPPIB.
And life insurance is only one of the many sectors CPPIB is trying to expand into. CPPIB made its its first major investment in the agriculture business last December with an $128-million purchase of a portfolio of Saskatchewan farmland.
"It's part of the evolution of our [investment approach], where we really focus on a number of individual strategies," Mr. Bourbonnais said of CPPIB's platform acquisition concept. "I think it's a theme you will hear from us over the next few years."