Brookfield Asset Management Voting Ord Shs Class A BXDIF

RBC

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Brookfield Asset Management Inc. Initial thoughts on BAM Reinsurance prospectus

Our View: Neutral.

First impression:

• Summary: BAM will pay a ~US$500MM special dividend (~US$0.33/BAM share), creating BAM Reinsurance Partners, with timing likely around the end of Q2/21. We expect the final prospectus in the next couple of months. Assuming approved, the shares will be listed on the NYSE and TSX under “BAMR.” BAM does not intend to have a "when-issued" market for the Class A Exchangeable shares prior to the special dividend.

• Share structure: BAMR will have 3 classes of shares: (1) Class A Exchangeable that are publicly traded with an initial value of ~US $500MM and based on BAM’s share price ~11MM BAMR shares outstanding; (2) Class B Limited Voting shares, not publicly traded (US $1MM invested by Partners Limited for ~22,000 shares based on BAM’s current share price); and (3) Class C shares, not publicly traded and 100% owned by BAM. Effectively, the Class C shares will reflect the appreciation/depreciation in fundamental value of the actual BAMR business.

• BAMR Class A shares are intended to be a "paired" entity with BAM (similar to BAM's BIP/BIPC and BEP/BEPC share structure) and “should” trade the same or very close to BAM's share price and not necessarily be reflective of the underlying fundamentals of BAMR. BAMR shares will also have the same US$0.52/share annualized dividend as BAM.

• Business overview: BAMR initially will have 2 segments: (1) annuity- based reinsurance products to insurers/reinsurers operating in North America and Western Europe; and the existing (2) pension risk transfer products for pension plan sponsors. BAMR intends to make money by investing the cash associated with the annuities/pension assets and seek to earn a higher rate of return than the required return payable to the annuity/pension recipients.

• When BAMR eventually reaches scale, we believe BAM is likely to fully spin off BAMR, similar to BPY, BIP, BEP and BBU where BAM would retain a major economic stake with BAMR having a more formal management fee plus incentive fee/performance fee structure payable to BAM. However, another alternative would be to have the reinsurance platform done within BAM's private funds business.

• If BAMR shares are meant to be the economic equivalent of BAM shares, yet BAMR has a much smaller market cap (and presumably share liquidity), why would an investor hold the BAMR shares? We think some investors may hold the BAMR shares in part for option value in the context that if BAM successfully grows BAMR, that at some point, if BAMR is fully spun off, there could be a significant valuation lift in BAMR's share price which would be based off BAMR's fundamentals (and not necessarily BAM's share price). In addition, some investors may find BAMR more attractive for tax reasons related to BAMR's distributions.