Brookfield Asset Management is launching a Bermuda-based reinsurance company that will take responsibility for billions of dollars of payments owed to American annuity holders, as the Canadian investment group looks to use insurance premiums to fuel its expanding lending business.
In an unusual financial manoeuvre that will further complicate Brookfield’s sprawling corporate structure, the Bermudan entity will take responsibility for up to $10bn worth of annuity policies originally written by American Equity Investment Life Insurance.
“The simple story is that we will receive up to $10bn of cash, invest those funds . . . and, if we can out-earn the rates we pay on the liabilities, we will do very well,” Brookfield chief executive Bruce Flatt told shareholders on Thursday.
Those multibillion dollar investments will flow through BAM Reinsurance, which will be incorporated in Bermuda, but is expected to be listed in New York and Toronto. It will initially be owned by existing BAM shareholders, who will receive shares in the new company in the first half of next year.
The Bermuda-based insurance company will be separate from Toronto-based Brookfield, a $575bn asset manager whose investments include the Canary Wharf office district in London, a railroad in Australia, and the American nuclear reactor-maker Westinghouse.
While BAM Reinsurance will be owned by a separate group of shareholders, and will focus on Brookfield’s insurance activities, its shares are intended to be “economically equivalent to the class A shares of BAM”, according to Brookfield.
That means BAM Reinsurance will pay the same dividends as its parent, even if the performance of the insurance business diverges from the rest of Brookfield’s diverse international portfolio.
And the insurance unit’s investors will be able to exchange their holdings for shares in BAM — a policy that Brookfield has previously used at some of its listed subsidiaries, which have traded at similar share prices even as their economic condition diverged.
For example, shares in Brookfield Property Reit (BPYU), which owns a large collection of North American malls, are exchangeable for units of Brookfield Property Partners (BPY), which owns a more diversified portfolio that includes office buildings and residential real estate.
The two companies’ shares have traded at about the same price, even in July, when the failure of many retailers to pay rent forced BPYU to renegotiate a $6.4bn credit facility.
Brookfield’s move into insurance follows a strategy that has become popular among private equity firms since it was pioneered by Apollo Global Management in the years after the financial crisis.
In an era of near-zero interest rates, alternative asset managers believe they can create complex, high-yielding — yet safe — credit investments by supplanting banks as lenders to a large section of the US economy.
Brookfield agreed last month to buy one-fifth of Iowa-based AEL. As part of the deal, the Canadian group will reinsure $5bn of annuity policies that have already been written, and up to $5bn worth of policies that AEL sells in future.
It follows Brookfield’s acquisition last year of Oaktree Capital Management, the credit-focused asset manager founded by Howard Marks and Bruce Karsh.