October 18, 2020
Brookfield Asset Management Inc.
Begins building an insurance business: Strategic partnership with AEL
Our view: Brookfield Asset Management Inc. (“BAM”) has agreed to a strategic partnership with American Equity Investment Life Holding Company (“AEL”), a leading US retirement planning annuity provider. The partnership establishes BAM as a 19.9% cornerstone investor and reinsurance counterparty of AEL, supporting continued growth opportunities for the business. As outlined recently at BAM’s 2020 investor day, the transaction is consistent with BAM’s strategy of expanding over time into several new verticals, including Insurance. We maintain our Outperform rating and $40 price target on BAM’s shares.
Key points:
Elements of the strategic partnership – The transaction appears to offer benefits to BAM and AEL. The three key element of the strategic partnership are: 1) BAM will acquire a 19.9% ownership interest in AEL for an estimated investment of $845MM (if AEL does well, so too will BAM on its sizable investment); 2) a reinsurance transaction through which BAM’s reinsurance and annuity subsidiary, Brookfield Asset Management Partners, will reinsure up to $10B of annuity liabilities (an initial $5B plus an incremental $5B of future business, when written), thus propelling BAM’s fee bearing capital; and, 3) BAM will provide AEL with “unique access” to its alternative asset strategies, thus providing a new distribution channel for BAM while also positioning AEL to generate enhanced returns in the context of today’s ultra-low interest rate environment.
More on the 19.9% stake in AEL – BAM’s investment in AEL will be in two stages: 1) an initial purchase of a 9.9% interest at $37/share following required regulatory approval; and, 2) a second purchase of an incremental 10.0% interest, at the greater value of $37/share or AEL’s adjusted BVPS. We believe the initial investment (10.1MM shares; $374MM) will be completed in the next several weeks. The second tranche (12.8MM shares; $472MM) may come in 6-8 months, subject to the finalization of certain reinsurance agreement terms, receipt of applicable regulatory approvals and other closing conditions. BAM will receive one seat on AEL’s Board of Directors following the initial equity investment.
Thwarting a takeover? – On Oct-1, AEL received an unsolicited non- binding proposal from Athene Holding Ltd. with Massachusetts Mutual Life Insurance Co. to acquire all its common shares at a price of $36. The strategic partnership with BAM would seem to thwart this takeover offer.
AEL Profile – American Equity Investment Life Holding Company, through its key wholly-owned subsidiaries is a leading issuer of fixed index annuities through independent agents, banks and broker-dealers. AEL's shares are covered by our RBCCM colleague Mark Dwelle.