How an insurer in Iowa became the most coveted asset on Wall Street

Private Capital Moment Man is nowhere near New York City. Rather, Anant Bhalla is based in his Des Moines, Iowa, sleepy west and runs a retirement company that attracts Wall Street’s smartest investors.

American Equity Investment Life last week rejected an unsolicited $4 billion offer from a rival controlled by Paul Singer’s Elliott Management, leaving Barra to invest in Canada’s Brookfield LLP, the company’s largest shareholder. It ended a tumultuous year that also antagonized asset management.

Underpinning the drama of the board is Bhalla’s determination to protect AEL from the wave of consolidation sweeping the industry as private equity firms acquire insurance assets.

The feud between Bhalla and Brookfield is the product of a deal AEL struck in November with startup fund manager 26North, founded by former Apollo Global executive Josh Harris.

Barra first set his sights on Brookfield in 2020 as he was looking for a white knight to fend off an earlier hostile bid from Apollo, where Harris was working at the time. Now, with Elliott’s bid going public, AEL and his $70 billion in assets are in the crosshairs as Wall Street investment giants surround the company.

Apollo, Brookfield, KKR, Carlyle Group, Ares and 6th Street are among the many groups likely to join next year’s hot auction.

“AEL is the last big player in independent/independent fixed-index annuities,” Jefferies equity analyst Daniel Bergman wrote in a recent note to clients. “Our sense is that there will continue to be strong demand from alternative asset managers looking to grow in the fixed index annuity space.”

The arrival of the Masters of the Universe looming over Iowa may sound contrived, but it’s nothing out of the ordinary. Private equity firms that once specialized primarily in leveraged buyouts have made debt investments a major pillar of their efforts to grow their asset bases to trillions of dollars.

Building and acquiring insurance operations has proven to be the preferred way for private equity firms to find stable and permanent capital derived from premiums paid by policyholders, and will continue to grow before paying customers in the years to come. and invest in new credit securities.

Bhalla has so far convinced AEL’s board and shareholders that the company can go it alone despite the whirlwind of deals, building a private equity-style independent insurer. He claims to have mastered the financial engineering necessary to do so. But his desire to keep AEL independent faces its biggest test yet.

“It’s a game of chess. His strategy looks interesting on paper, but it’s hard to execute,” said a private equity executive not involved in the bid.

Bhalla is one of those investors who believes that pension providers need to go beyond ordinary bonds and invest in exotic bonds.

This is a strategy pioneered by Apollo when Harris was working there. In 2009 he bought a block of troubled pensions from AEL, eventually forming the foundation of the Athens pension business. Apollo’s bet was that if premiums were more aggressively invested, both annuity sellers and policyholders would benefit.

After stints at MetLife and AIG, Bhalla assumed the role of Chief Executive Officer of AEL in early 2020. Bhalla became a close friend of Peter Hancock, a longtime executive at JP Morgan who took command of an insurance company that teetered after the financial crisis. At MetLife, Bhalla was heavily involved in splitting the retail life insurance business into publicly traded He Brighthouse Financial, where he became the Chief Financial Officer.

“Anant is a very smart tech guy with great creative ideas,” said the private equity executive. “He did a great job. Some people would say he was a little too smart and too impractical for his own good.”

Within months of joining AEL, Bhalla’s ambitions would be tested by unsolicited bids from Apollo as well as MassMutual. At that point, he decided to sell his stake to Brookfield, almost his one-fifth, in order to fend off his suitors.

At the same time, Bhalla unveiled a new strategy dubbed ‘AEL 2.0’, which it said would boost shareholder returns. Rather than selling to a private equity firm, AEL entrusts investment management to multiple managers with expertise.

Since then, the company has signed deals with groups such as Pretium Partners, Adams Street and Monroe Capital. Nearly one-fifth of his assets are now invested in private capital, according to AEL, which has helped lift his annual investment yield to his 4.3% from 4.0% in 2020.

In an interview with the Financial Times after Elliott’s bid, Barra said this so-called open architecture is “best for policyholders.”

Separately, AEL is looking to boost equity returns with a stronger focus on its reinsurance business. This seems to have irritated Brookfield, who signed a reinsurance agreement with AEL when he first took the stake. Under that arrangement, Brookfield paid AEL a fee in exchange for the transfer of billions of dollars of debt that Brookfield wanted to invest.

The controversy erupted in unusually dramatic fashion in November, when earnings-call analysts began bombarding Bhalla with questions about why a Brookfield executive on AEL’s board had suddenly resigned. I had a hard time. Because he just found out: Securities filings containing the news were released while the call was in progress.

In a letter explaining his departure from the board, the outgoing director of Brookfield said there was a “fundamental change in AEL’s strategic direction.”

This change in strategy was a new agreement with Harris’s 26North under which the two companies signed a reinsurance partnership. AEL also bought a stake in his 26North, though the amount was not disclosed.

Since removing its representatives from AEL’s board of directors, Brookfield has called on the Iowa company to disclose the process and terms of the 26North transaction. The suggestion is that Barra unwisely cooperated with what Brookfield believes to be an unproven venture by teaming up with Harris.

However, Bhalla recently told investors that the 26North deal was a sideshow and that the real reason the parties dropped out was because Brookfield acquired a rival insurer in May, making it a “direct competitor” to AEL. He said. “You can come to your own conclusions about Brookfield’s motives,” he added.

Regardless of who’s right, the public boardroom commotion put AEL in the spotlight and did its part. On Dec. 8, Elliott’s life insurance affiliate, Prosperity Group, submitted his $45 a share offer, which has been repeatedly rejected by AEL as “opportunistic.”

A person involved in the situation said one large private capital manager told Property that he was happy to have AEL on board and that he had expressed interest in pursuing a bid.

In late November, AEL granted Bhalla 1.2 million new shares, vesting between $45 and $60. Selling the company at $45 per share means missing out on the windfall gains entirely.

Bhalla was able to keep AEL independent in 2020, but it could prove more difficult to get out of the hands of buyers this time around. Brookfield went from being a white knight to a thorn. He said he would immediately exercise his right to be reappointed.

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