Author Topic: BAM - Brookfield Asset Management  (Read 594199 times)

tiddman

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Re: BAM - Brookfield Asset Management
« Reply #1830 on: November 16, 2020, 07:42:42 AM »
Yeah I am not sure that I totally get it. It's a tracking stock, tracking some combination of AEL and their internal operations. They have said that part of the deal with AEL is reinsuring some of their liabilities, that would be outside of AEL and probably on BAM's balance sheet or a subsidiary's. So the tracking stock would in part track this also. The juice in the squeeze is from the investments that BAM looks to make with AEL's float plus I'm guessing asset management fees on that float. Will the tracking stock include all of this, or just the returns, or just the fees? It's a tangled web we weave.

Reinsurance is a big boy's game with big boy losses if something goes wrong, so I think that BAM using their own balance sheet in this way is a bit of a red flag for me, but I guess they know what they are doing.

I do understand the basic motivation, basically small insurers like AEL are essentially pools of tens of billions of investable AUM that are particularly well suited for credit strategies that Brookfield now has the capacity for after the Oaktree deal. When trying to grow AUM from $500B to $1500B and beyond you need to get it in larger chunks and you can't really spin up $50 billion investment funds. But accounting for it is going to be tricky.


Jurgis

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Re: BAM - Brookfield Asset Management
« Reply #1831 on: November 16, 2020, 08:54:16 AM »
I am not sure I understand BAMs thought process of first spinning off Trisura (which has been growing gangbusters after spinoff) and then going into reinsurance themselves. Maybe Trisura was too small to matter compared to potential reinsurance but still you'd think it could have been a foundation for insurance/reinsurance group inside BAM.  ::)
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petec

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Re: BAM - Brookfield Asset Management
« Reply #1832 on: November 16, 2020, 09:05:43 AM »
I found the call illuminating.

They were clear that, although they will earn fees on the AUM, their main motivation is to compound the capital invested. They see the equity backing long tail liabilities like AEL's as trading well below market due to several decades of falling rates and think this is the lowest-risk time to buy such liabilities in their lifetime.

As for the structure, you need to differentiate between contents and pairing.

BAMRP equity will have the assets and liabilities of the AEL reinsurance deal as well as those of other reinsurance deals seeded on the BAM balance sheet. The difference between the assets and liabilities is obviously BAMRP equity, which will consist of the initial stake in AEL and the equity BAM has used to seed the aforementioned insurance ops.

However BAMRP will be paired with BAM. This is done by giving shareholders the same dividends as BAM pays and convertibility into BAM stock. BAMRP therefore does not track AEL.  But much more importantly, by not completely separating BAMRP, BAM can inject equity without causing BAMRP to issue new shares (they were explicit about this on the call). This means they can inject equity at 1xBV whenever they want.

Had they not done this, BAMRP would have been at the mercy of the market and might have been forced to issue equity below intrinsic value. In fact this is quite likely: most of BAMRP's starting equity is AEL stock, so it would have basically been an illiquid AEL tracking stock. It might well have traded at a discount to a BV made up of what BAM considers to be undervalued stock.
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petec

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Re: BAM - Brookfield Asset Management
« Reply #1833 on: November 16, 2020, 09:12:43 AM »
I am not sure I understand BAMs thought process of first spinning off Trisura (which has been growing gangbusters after spinoff) and then going into reinsurance themselves. Maybe Trisura was too small to matter compared to potential reinsurance but still you'd think it could have been a foundation for insurance/reinsurance group inside BAM.  ::)

Yeah I wondered that. I don't know Trisura well enough to comment. But they are explicitly looking for long tail liabilities, I think - life insurance, annuities, pension risk transfer. Is that what Trisura does? I don't think BAM care about short tail stuff.

The cynic in me says maybe Trisura didn't need the scale of capital BAMRP needs, and therefore could realistically be spun off, with the BAM principals keeping their upside via the holding in Partners, whereas BAMRP will need a lot of capital over the next decade and therefore needs to stay near the maternal teat.
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gokou3

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Re: BAM - Brookfield Asset Management
« Reply #1834 on: November 16, 2020, 10:50:09 AM »
...by not completely separating BAMRP, BAM can inject equity without causing BAMRP to issue new shares (they were explicit about this on the call). This means they can inject equity at 1xBV whenever they want.

This is the part from the Q3 call that I do not understand.  How does BAMRP get incremental equity capital from BAM without the former issuing new shares to BAM?

petec

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Re: BAM - Brookfield Asset Management
« Reply #1835 on: November 16, 2020, 11:59:07 AM »
...by not completely separating BAMRP, BAM can inject equity without causing BAMRP to issue new shares (they were explicit about this on the call). This means they can inject equity at 1xBV whenever they want.

This is the part from the Q3 call that I do not understand.  How does BAMRP get incremental equity capital from BAM without the former issuing new shares to BAM?

Iím not sure and donít have the legal knowledge to give a proper answer. But I think it must retain the legal status of a wholly owned subsidiary. As such, BAM can inject money by issuing new shares or by increasing the value of existing shares. In effect BAM sets the issue price, not the market.
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tiddman

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Re: BAM - Brookfield Asset Management
« Reply #1836 on: November 16, 2020, 03:15:10 PM »
The type of float/liabilities that you get at AEL are very different than Trisura. AEL is primarily a life insurance / annuity company whereas Trisura is primarily commercial, surety, etc. I am not an expert but Brookfield has said that the annuity type float lends itself to credit investments, I am guessing it is more of a spread game.  Commercial insurance would have very different actuarial qualities I would imagine.

ValueMaven

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Re: BAM - Brookfield Asset Management
« Reply #1837 on: November 16, 2020, 04:21:22 PM »
The type of float/liabilities that you get at AEL are very different than Trisura. AEL is primarily a life insurance / annuity company whereas Trisura is primarily commercial, surety, etc. I am not an expert but Brookfield has said that the annuity type float lends itself to credit investments, I am guessing it is more of a spread game.  Commercial insurance would have very different actuarial qualities I would imagine.

Yes.  That is correct.

petec

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Re: BAM - Brookfield Asset Management
« Reply #1838 on: November 16, 2020, 10:03:32 PM »
All float lends itself to credit. I think what matters more is the duration of the float. BAM are basically betting that rates donít go much further down. If thatís true then the discounted value of long tail liabilities will stop rising, which is why they think there is little risk in buying them and they can pocket the spread. My guess is Trisura writes short tail risks.
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Gregmal

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Re: BAM - Brookfield Asset Management
« Reply #1839 on: November 21, 2020, 04:05:11 PM »
https://seekingalpha.com/article/4390625-billionaire-investor-says-buy-reits

Good collection of thoughts from Flatt on various RE. Obviously, I tend to agree with him.