Brookfield Seeks Hard-to-Get Prize in American Equity Deal

After dancing around a deal for years, the last big independent seller of fixed annuities might finally be pushed into an awkward embrace with its biggest shareholder.

American Equity Investment Life Holding is mulling a cash-and-stock offer this week from Brookfield Reinsurance, the publicly traded insurance arm of Canadian investment giant Brookfield Asset Management. Under the deal, Brookfield would buy the portion of the company it doesn’t already own for $55 a share, valuing American Equity at $4.3 billion.

Brookfield said in a regulatory filing it was aiming to reach an agreement with American Equity by Friday, but there is no guarantee the insurer’s board will make a decision within that timeline.

For Brookfield, which already owns around 20% of American Equity’s stock but no longer has a board seat, there were only three options: hold the stock and accept the company’s strategic direction, sell the stock, possibly at a discount, or buy the company outright.  

Should a deal for American Equity be reached, it would be a landmark moment for private-equity investors’ increasing presence in the huge annuity market. “It’s the last one standing,” said Wilma Burdis, an insurance analyst at Raymond James, of the insurer.

The Brookfield offer comes at a boom time for fixed annuities. The sharp rise in interest rates since spring 2022 has pushed up the returns offered on annuities, making them an attractive alternative to certificates of deposit for some investors.

Annuity sales by all companies, including insurers, topped $94 billion in January through March, up 49% from the first quarter of last year, according to industry-funded research firm Limra. American Equity sold $964 million of fixed-index annuities from January through March, a 23% increase on the previous quarter and 9% higher than the first three months of 2022.

Private-equity firms have ramped up their exposure to annuities in the past decade, either by buying insurers outright or striking part-ownership deals that carry the right to manage the assets underlying the policies. Sales from firms backed by private investors last year accounted for a quarter of fixed and indexed annuity sales, compared with a 7% market share in 2011, according to consulting firm McKinsey. 

Buying annuities offers private investment firms a chunk of money to manage. Fixed annuities, which typically pay policyholders a guaranteed minimum income, are attractive to private-equity firms because they must only earn a return that is higher than the specified payout rate to policyholders, a difference known as a spread. 

American Equity has proven an elusive target for private-equity suitors, with a string of rejected offers going back to 2018. The current takeover drama kicked off in September 2020 when Apollo Global Management’s insurance company Athene Holding and Massachusetts Mutual Life Insurance offered to buy American Equity for more than $3 billion, or $36 a share. The company’s board rejected the deal, opting instead to sell a roughly 20% stake to Brookfield for $37 a share, with Brookfield taking a seat on American Equity’s board. 

Then in December 2022, Prosperity Life Insurance Group and its principal shareholder, hedge fund Elliott Investment Management, made a $45 a share offer for American Equity. The insurer’s board rejected that offer, too.

American Equity had already been a sought-after target. It considered transactions in 2018 and 2019. Athene was one of the interested parties, The Wall Street Journal reported.

American Equity Chief Executive Anant Bhalla has had his own strategy for the company, which he calls AEL 2.0. It involves shifting a significant minority of assets from the plain-vanilla bonds that are a staple of insurers to higher-risk, higher-return private assets, such as real estate and lending. American Equity formed partnerships with a number of asset managers, including New York credit manager Pretium Partners and Chicago-based

The strategy got the insurer into hot water with Brookfield last November, when American Equity struck a reinsurance deal with 26North Partners, a private-equity firm launched last September by Apollo co-founder Josh Harris. The move to join with a newly minted rival firm, effectively putting 26North into the insurance business, so angered Brookfield that its representative to the board stepped down, according to people familiar with the matter. He announced his resignation in a regulatory filing minutes before American Equity’s third-quarter earnings call.

American Equity’s shares plummeted 21% that day. The drop left an opening for the Prosperity-Elliott bid, though the firms wouldn’t have been getting it cheaply. Analysts from Autonomous Research said the offer valued American Equity at about nine times its estimated earnings per share for 2023 and 1.1 times adjusted book value, putting it at the upper end of the valuation range for recent fixed-index annuity deals.

It “will likely take a significantly higher offer than $45 to get a deal done, and we question whether that makes sense for a potential buyer,” they wrote in a December research note. 

Write to Miriam Gottfried at [email protected] and Jean Eaglesham at [email protected]