Brookfield Reinsurance (BNRE) announced on June 27 that it would buy the shares of American Equity Investment Life Holding Company (AEL) that it didn’t already own for $55 per share.
AEL shares jumped 17% on the news.
Brookfield’s offer values AEL’s equity at $4.3 billion. According to American Equity’s June 26 13D filing, Brookfield Re already owned 20.4% of the company.
The cash-and-stock transaction sees the reinsurance business pay $38.85 cash per share and issue Brookfield Asset Management (BAM) shares worth $16.15. The purchase price is a 35% premium to its 90-day volume-weighted average price.
To pay for the acquisition, Brookfield Re will acquire BAM shares from Brookfield Corporation (BN) to fulfill the stock portion of the purchase price. As a result, BAM's public float will increase by 10%, reducing Brookfield Corporation’s ownership in BAM by 200 basis points to 73%.
If AEL shareholders are smart, they’ll roll over their BAM shares received as part of the transaction.
Here’s why.
Brookfield’s An Alternatives Giant
Based on the $16.15 in BAM shares AEL shareholders will receive for the stock portion of the deal, 100 shares of AEL translates to approximately 50 BAM shares and $3,885 in cash.
Should the deal be approved by American Equity’s shareholders, Brookfield Re’s assets under management (AUM) will increase to $100 billion, while Brookfield Asset Management’s AUM will grow to approximately $900 billion.
As part of the transaction, Brookfield plans to continue AEL’s push into alternatives. Brookfield Asset Management will manage a significant piece of AEL’s portfolio.
The acquisition of AEL is an excellent fit for Brookfield Reinsurance, according to Truist Securities analysts.
“Annuity players like AEL are a natural fit for larger asset managers that are able to generate synergies in asset accumulation and portfolio management,” Yahoo Finance reported the analysts’ comments from their note to clients. “Given the large number of players in the industry and AEL’s modest market share, there should be no antitrust concerns.”
Brookfield is well-known for buying assets that it can use as a platform for growth.
The $55 price from Brookfield is $10 more than a December offer from Prosperity Life Insurance Group, a firm backed by activist investor Elliott Management. AEL refused to talk with the prospective buyers, so the group withdrew their proposal.
Before the December offer, AEL received an offer in 202o from Massachussetts Mutual Life Insurance Co. and Athene Holding Ltd., now owned by Apollo Global Management (APO). To ward off the pursuers, AEL sold a minority stake in the company and agreed to reinsure up to $10 billion in existing and future annuities.
Given AEL’s existing relationship with Brookfield Re, the odds of this closing by June 30 are high.
What’s Brookfield Getting?
AEL reported its Q1 2023 results in early May. Its results included total sales of $1.4 billion, almost $1 billion for fixed index annuities (FIAs), and non-GAAP operating income of $124.3 million, up 16% from a year earlier.
CEO Anant Bhalla joined AEL in early 2020. By December 2020, it had unveiled its AEL 2.0 strategy, which included expanding its third-party investment management efforts in the private capital markets.
As part of its strategy, it wanted to move its business to a more asset-light, fee-based model, where approximately 30-40% of its investment portfolio would be invested in private assets, double its historical norm.
Private assets it’s invested in as part of its strategy include residential and commercial real estate, middle market corporate loans, agriculture loans, and real estate debt.
“Over the next few years, we intend to further scale up [our] allocation to private assets, total assets earning fees or investment spread, and third party capital through reinsurance… improving shareholder returns by migration to the capital-light model we envisioned,” The Retirement Income Journal reported Bhalla’s 2021 comments.
“AEL is re-imagining its target markets to be The Financial Dignity Company that delights customers as they realize financial dignity from our solutions well beyond their prime earnings years.”
At the end of 2022, AEL had allocated $11 billion, or 22% of its investment portfolio, to private assets. By March 31, 2023, its private assets accounted for 24.2% of its investment portfolio.
The Bottom Line
The name of the game in asset management is scale. The more you manage, the higher your fees; the higher your fees, the more risk you can take on without affecting the overall quality of your investment portfolio.
“Brookfield Reinsurance intends to continue AEL’s focus on alternative asset strategies and expects BAM will manage a significant portion of AEL’s assets,” stated Brookfield Re’s letter announcing the offer.
“As a result, AEL will gain access to BAM’s leading direct origination platforms and
asset management capabilities while maintaining its current high-quality bias and investment grade focus.”
For Brookfield Asset Management to acquire the 80% of AEL that it didn’t already own makes total sense to me because it has historically done a good job growing assets it acquires and then selling them for significantly more years later as part of its capital recycling program.
Down 29% over the past year, AEL shareholders are getting BAM shares at just the right time, so jump on the Brookfield bandwagon. There’s plenty of room.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
