- The Unite Here union in a full-page Des Moines Register ad is urging customers of West Des Moines-based American Equity to protest its sale to a company affiliated with a private equity firm
- Sales of similar retirement annuity providers have resulted in money-losing investments in commercial real estate, cautions the union
- The deal could reap millions in profits for American Equity leaders and companies that own shares in the firm
A labor union this week called on customers of American Equity Investment Life Insurance to protest the West Des Moines company’s pending $3.4 billion sale, which could reap multi-million-dollar profits for some American Equity leaders.
In a full-page ad placed in the Des Moines Register on Monday, Unite Here officials warned that American Equity’s Bermuda-based buyer, Brookfield Reinsurance, would place customers’ money in “inherently risky” investments like commercial real estate loans.
Annuity providers like American Equity have traditionally invested in safer assets like government bonds. But private equity firms like Brookfield Reinsurance affiliate Brookfield Corp. increasingly have been acquiring the retirement insurers and using their customers’ money in less secure investments that could provide much bigger returns.
Unite Here, which represents 262,000 members across the country, does not have any locals in Iowa. A union spokesperson did not respond to a Register’s question about whether members have retirement insurance through American Equity.
But the union has been a critic of private equity influence in retirement insurance for about a decade. The union is also trying to organize workers at a Sonoma, Arizona, hotel owned by Brookfield Corp.
In the ad, the union’s leaders encouraged customers to protest the American Equity sale during a legally required Iowa Insurance Division hearing on the sale, which the division has not yet scheduled.
“When you bought your annuity,” the union asked in the ad, “did you think you were signing up for investments in an inherently risky industry or the ‘office real estate apocalypse?'”
Unite Here placed a similar ad in a newspaper in Galveston, Texas, home to American National Insurance Co., which Brookfield Reinsurance bought in May 2022.
Responding in a statement, a Brookfield Reinsurance spokesperson told the Register, “Brookfield has a world-leading asset management platform that provides insurers with access to investment opportunities that deliver long-term capital benefits. Our core mission remains to protect the policyholders who depend on us.”
An American Equity spokesperson declined to comment on the ad.
Brookfield Reinsurance, which owns a 20% stake in American Equity, agreed to buy the rest of the business in a deal announced July 5 that valued the company at $4.3 billion. The deal is expected to close in the first half of next year.
Brookfield Corp. invests in real estate, energy, infrastructure and private credit businesses. The company spun Brookfield Reinsurance off into a separate business in June 2021, with Brookfield investing the insurance company’s money. Brookfield steers some of that money into other businesses it operates.
In its ad, Unite Here said that when Brookfield bought American National, the insurer began selling off its safer, potentially less lucrative investments. As of September, American National reported that it was trying to sell $13.1 billion of bonds ― up from $8.4 billion available for sale during the same time in 2021.
Unite Here said that “hundreds of millions of dollars” from American National policyholders went to Brookfield’s real estate holdings, a line of business that has been stressed since the COVID-19 pandemic sank the value of office space.
Brookfield Property Partners, which operated as a separate, publicly traded company at the time, lost about $2 billion in 2020, according to the Real Deal, a real estate news outlet. Brookfield bought outstanding shares of the company for $6.5 billion to take the business private in 2021.
In February and May, Brookfield defaulted on $1.1 billion in loan payments for three office buildings in downtown Los Angeles, according to the Real Deal. The website also reported that Brookfield defaulted on a $161 million mortgage tied to a dozen office buildings around Washington, DC Rising interest rates pushed monthly payments on that loan to $880,000 from $300,000 in a year.
But a company spokesperson told the Real Deal that “while the pandemic has posed challenges to traditional offices in certain US markets, this represents a very small percentage of our portfolio.”
American Equity was already thinking like a private equity company
While Unite Here criticized Brookfield’s investment decisions, Brookfield’s Reinsurance purchase may not represent a dramatic shift for American Equity, where executives have already begun to emulate private equity firms’ investment practices.
After Anant Bhalla became CEO in 2020, American Equity announced that it was seeking reinsurance partners who would invest in American Equity’s assets and provide the company annual fees and a percentage of profits.
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The company reached an agreement with Brookfield in October 2020. Brookfield bought a 16% stake in the company for $590 million over the next two years. The company has since increased its stake in American Equity to 20%.
While handling some of American Equity’s assets, Brookfield agreed to pay the company $4.36 billion in management fees in 2021 and 2022.
American Equity reached a similar agreement last October with 26North, a new private equity firm launched by Apollo Global Management founder Josh Harris. 26North paid a $70 million closing commission to American Equity on Oct. 3.
American Equity began investing more in commercial real estate the year before the pandemic, with the value of its mortgages in that sector increasing by 17% in 2019 to $3.46 billion. The company focused on retail buildings and apartments at the time.
Last year, the company’s investment in mortgages and real estate grew by another 32%. But the company shifted its focus to home lending. The value of American Equity’s residential mortgages increased to $2.9 billion in 2022 from $1.7 billion.
At the same time, the company became less interested in fixed securities like government bonds. The value of those investments decreased by 24% to $39.8 billion.
Who holds the most American Equity stock?
While Brookfield is the largest American equity shareholder, three other investment firms control about one-third of the company’s stock:
- BlackRock (13%).
- The Vanguard Group (12%).
- Dimensional Fund Advisors (8%).
Brookfield’s offer represents a 35% premium over what American Equity’s stock traded at the week before the companies disclosed the potential deal. For BlackRock, that premium represents about $165 million above what its American Equity stock holdings were worth.
The premium equates to about $141 million for Vanguard and $100 million for Dimensional Fund.
Spokespeople for BlackRock and Vanguard did not respond to emails from the Register concerning their votes on the pending deal. A spokesperson for Dimensional Fund declined to comment.
How much will American Equity’s executives and board members earn on the deal?
Dotted with local leaders, American Equity’s board had rejected a $37-per-share deal from Athens and MassMutual Life Insurance Co. in 2020. It also turned down a $45-per-share offer from Prosperity Group Holdings and Elliott Investment Management in December.
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By holding out until Brookfield Reinsurance’s $55-a-share offer, some board members stand to gain millions more. Based on the amount of stock they owned in April, earnings among board members from a sale to Brookfield would include:
- $6.9 million for David Mulcahy, owner of Adel-based MABSCO Capital.
- $5.8 million for Gerry Neugent, former CEO of Des Moines-based Knapp Properties.
- $4.7 million for Robert Howe, former Iowa Insurance Division chief regulator.
- $3.5 million for William Kunkel, former American Equity general counsel.
- $3 million for Joyce Chapman, former vice president: of West Des Moines-based West Bank.
- $1.1 million for Brenda Cushing, former chief financial officer at West Des Moines-based Athens.
Jeffrey Lorenzen, American Equity’s chief risk officer, stands to earn about $7.1 million for his shares. Chief Investment Officer James Hamalainen, meanwhile, stands to earn about $6.9 million
CFO Axel André, who joined the company in September 2021, is in line to receive about $830,000 for his stock. Brookfield also agreed to renegotiate his severance agreement, which would now pay André about $10.4 million, up from $6.9 million under the old contract.
Bhalla, the CEO, stands to earn $35.6 million for the shares he owned as of April. However, he may potentially earn much more than that. The American Equity board awarded him a new incentive contract in November, paying him extra if the company’s share price hit certain targets.
At the time, the company’s stock traded for around $39 a share. But if the company stock could reach $55, the board agreed to give Bhalla 999,999 more shares. In January, Brookfield criticized the incentive as “a grossly disproportionate executive compensation scheme.”
If Brookfield’s $55-a-share offer triggers that incentive for Bhalla, the sale will bring his total compensation to about $90 million.