Brookfield Reinsurance Ltd.NYSE:BNRE) operates a leading capital solutions business providing insurance and reinsurance services to individuals and institutions. Through its operating subsidiaries, Brookfield Reinsurance offers a wide range of insurance products and services, including life insurance and annuities, and personal and commercial property and casualty insurance.
BNRE has grown rapidly and now has $47 billion in assets under management, located in companies and subsidiaries rated A- or better.
Brookfield Re is a 100% subsidiary of Brookfield Corporation (BN) and it is important for investors to understand how BNRE fits into the overall Brookfield landscape.
Structure of the Brookfield Group
Brookfield Corporation is a highly respected Asset Management and Alternative Assets company led by legendary Canadian investor, Bruce Flatt. Long-term performance for investors has been strong, with a 20-year return of 1,600%.
The maximum return at the end of 2021 was as much as 2200%. The steep drop in the chart above highlights one of the challenges for investors at Brookfield. The group is quite complex in structure, and the management team is very active in capital management and corporate restructuring. It’s not easy to approach both stock price performance.
In 2021, Brookfield acquired Brookfield Property Partners (BPY) private, which significantly reduced the requirements for providing public information of that part of the business. This turned out to be timely, as the commercial real estate market has been under considerable stress, resulting this year in a reported $1 billion. Brookfield property loan default.
In early 2023, Brookfield trades below the bar (BAM) spun off 25% of its asset management business, with the asset management business taking the title BAM, and the remaining “distressed” assets under the ownership of the newly branded Brookfield Corporation (BN) which owns the property interests , infrastructure, renewable resources and insurance business. This restructuring and disposal should be factored into the assessment of the group’s performance over time.
It is not easy to piece together the new structure from the various Brookfield Group reports. I’ve compiled the summary below.
Brookfield Re is 100% owned by Brookfield Corporation, and shares are exchangeable for BN shares on a 1-1 basis. of the details of that agreement are displayed on Brookfield’s website.
Brookfield Insurance Solutions is one of the three main business areas on the first level of the new Brookfield Structure.
of the business is described on the Brookfield website. Brookfield Re is positioned as a capital solutions provider and asset manager active in life insurance and annuities, personal and commercial property/casualty insurance and reinsurance solutions with $46 billion in assets under management.
The company is headquartered in Bermuda and organizes its activities between Direct Insurance, Reinsurance and Pension Risk Transfer [PRT].
Shareholders have not been rewarded to date, with the share price down around 60% since inception.
The business is showing rapid growth, both organically and through acquisitions.
The third quarter the results were published on November 9, and show strong asset growth.
Business highlights were dominated by the acquisition of American National, a Texas-based Property Casualty Insurer, but also rapid growth in the Annuity and PRT business, and a significant headwind from asset portfolio repositioning. However, net income was lower, which was attributed to the market’s loss of investment.
Interestingly, the basis of accounting was changed from IFRS to US GAAP, presumably to allow easier consolidation of US National, which will make peer comparisons with other players in the PRT and annuity space, as Legal & General (OTCPK: LGGNY) and Manulife (MFC) more difficult to move forward.
As shown by the Y charts, ARGO has been a poor performer, producing negative net income and experiencing a 66% drop in share price.
Yes, ARGO was bought at a low valuation compared to mid-2021 levels, but it’s not clear how Brookfield will turn this business into profitability. It is possible that BNRE sees the ARGO assets backing their insurance obligations as good value. The offer is only a slight premium to ARGO’s market cap, and ARGO is trading slightly below book value. However, book value requires that liabilities be adequately reserved, and I am skeptical about the reserve levels of underperforming US P&C Insurers. 10% arbitrage seems like a poor risk/return trade to me.
All this growth required capital, and Brookfield Corporation has stepped up, offloading $2.1 billion in real estate and other assets to BNRE in exchange for newly issued Class C shares. My interpretation is that BN pumped up BNRE’s balance sheet with $2.1 billion in commercial real estate assets from privately held Brookfield Real Estate at current book value, diluting BNRE’s shareholders by issuing new shares in exchange. BN’s ownership of these assets falls from 100% to the number of their shares held in BNRE as a % of BNRE’s total shares. Granted, BN and BNRE are ‘paired’ listings, so in theory BNRE shareholders could come back, and BN states that BNRE shareholders have not been diluted as a result – I, for one, am left scratching my head to find out. put it all together.
For BNRE, under US GAAP accounting, the mark-to-market value of their asset base will stabilize, as BN has control over the book value of real estate assets and solvency will increase to enabling them to fund new insurance liabilities.
Brookfield then launched an Exchange Offer, which invited BN shareholders to exchange their BN shares for BNRE shares. of the results of this offer they were just published. 32.5 million shares will be exchanged, with the issuance of new Class A shares in BNRE, raising a further $1.2 billion in capital for BNRE, at zero cost to BN.
In general, I am reminded of the old shell game, in which the sleight of hand confuses the gamblers. It’s certainly smart capital management, but is it in the long-term interest of BNRE shareholders?
Brookfield Re’s Future Outlook.
Apart from the closing of the Argo transaction, BNRE does not clearly articulate much of a business strategy. Investors are left with the following statement.
“With the closing of the Argo Group and AEL transactions, we will have over $100 billion in assets across a diversified life, annuity and P&C platform. With strong, complementary distribution channels between the companies and our existing platform, we have a credible avenue. to significantly grow our insurance assets organically and by leveraging Brookfield’s investment capabilities, these assets will be redeployed with attractive risk-adjusted returns, increasing margin earnings and providing significant returns to our shareholders.
This focus on assets under management rather than underwriting a profitable business is reminiscent of the Total Return Reinsurer model operated by Bermudian reinsurers such as Greenlight Capital (GLRE) which have not resulted in creating shareholder value. Other total return reinsurers such as Third Point Re and Watford Re no longer exist as independent entities.”
Given the generally opaque reporting and complex business model, it seems difficult to value BNRE. Alpha Quant Research does not provide coverage, nor does Morningstar. It is quite difficult to find any in-depth analysis of the company.
I think price to book value is a good way to look at this, and as can be seen, BNRE does not offer compelling valuation compared to peers. I chose Manulife (MFC) as a peer in the Canadian life and annuities space, and GLRE as a Bermudian total return peer.
As you can see, BNRE trades around book value, at a significant premium to GLRE and a slight discount to MFC. Given that MFC has a long history of profitable growth and provides detailed disclosure of its strategy, I see a 10% price premium to BNRE as fully justified. Readers may be interested in my recent article on MFC. In general, I don’t know enough to invest in or against BNRE. My position is to avoid BNRE for now. However, I am tall in both BN and BAM.
Risks to my thesis.
My general position on BNRE is skepticism. I don’t like to invest in a business I don’t understand, and while I understand the Insurance and Reinsurance business very well, BNRE’s strategy and business disclosure are not clear enough for me to form a confident view. The risk for me is that BNRE manages to dramatically outperform the companies in which I invest. Since the valuation gap isn’t compelling – I’m prepared to take that risk.
Brookfield is a great value creator, but value creation is not even among all entities.
The group is managed with great ingenuity, but with complexity and ambiguity.
BNRE is smartly capitalized but questions their strategy and focus on asset management rather than quality assurance.
My position is to follow BNRE’s progress but avoid the stock for now.