A pair of insurance companies made a bid for American Equity Investment Life Holding last month, in a bet that the small Iowa insurer’s retirement income products will continue to be popular with conservative savers.

Massachusetts Mutual Life Insurance and the publicly traded Athene Holding offered American Equity $36 a share in cash on September 8, according to a letter sent to American Equity’s chief executive that was viewed by The Wall Street Journal. At that price, the bid would amount to a value of more than $3bn.

American Equity confirmed on October 1 after the WSJ story that it received the offer and said that its board is reviewing the proposal in consultation with its financial and legal advisers.

American Equity shares jumped 44% on Thursday, October 1, pushing the company’s market value to $2.9bn from about $2bn.

Athene was founded in 2009 and specialises in annuities. The company, which is about 35% owned by Apollo Global Management has about $162bn in assets.

All sorts of insurance products — including annuities and basic life insurance — have been hit hard by more than a decade of low interest rates. With “indexed annuities” like those sold by American Equity, insurers take lump sums from consumers and invest the money, aiming to earn more than they are obligated to pay out.

Athene and some other insurers with ties to asset managers like Apollo have been more comfortable than traditional players in venturing beyond high-quality corporate bonds to turn a profit amid the low-rate environment.

Insurers selling indexed annuities have also been affected by the coronavirus pandemic. Such annuities are typically sold in an old-fashioned way: Life-insurance agents sit down with potential buyers in face-to-face conversations.

As government stay-at-home orders and fear of Covid-19 have made those conversations next to impossible in many parts of the US, sales of indexed annuities plummeted in the second quarter. They slid 26% to $28.2bn from $38bn a year earlier, according to life insurance industry research firm Limra.

Under the proposed deal, MassMutual would acquire American Equity’s insurance subsidiaries and all of its employees, brands and distribution arrangements. MassMutual would reinsure 80% of American Equity’s existing business to Athene and retain the remaining 20%, according to the letter.

After the WSJ report, Athene disclosed a copy of the letter in a regulatory filing. A spokeswoman for MassMutual confirmed its role in the proposal presented to American Equity.

American Equity said in its news release that JPMorgan and Morgan Stanley are acting as financial advisers and Skadden, Arps, Slate, Meagher & Flom is acting as legal counsel.

MassMutual, which is owned by its policyholders and isn’t publicly traded, is one of the nation’s oldest and financially strongest life insurers. Acquiring American Equity would expand its annuity offerings and distribution capabilities, as the small company has extensive arrangements with independent marketing organizations and independent advisers.

MassMutual sells primarily through a large fleet of career agents.

One of the appeals to MassMutual of an acquisition is that it has the ability to financially strengthen American Equity and make technological improvements. That could make its annuities more appealing for sales through banks and broker-dealers. MassMutual said in the letter that it wants to retain American Equity’s management team, which would run the business as an independent operation.

Evercore ISI analyst Thomas Gallagher said the offer’s “commanding premium…creates a high hurdle for management to argue that this offer is not in the best interest for shareholders.”

If the American Equity deal goes through, it would be the latest in a string of transactions since the global financial crisis of 2008-09. The crisis ushered in ultralow rates that make it harder for many insurers with traditional investment strategies to turn profits on certain types of annuities, like the indexed ones.

Acquirers mostly have been insurance companies like Athene backed by private equity firms or other financiers who are comfortable investing in potentially higher-yielding but possibly riskier mortgage-backed debt and other securities. Athene has maintained that its portfolio is well balanced and safe for consumers.

In July, KKR agreed to buy the retirement and life insurance company Global Atlantic Financial Group for more than $4.4bn.

American Equity considered transactions back in 2018 and 2019. At the time, it confirmed news reports that it was up for sale, later saying those discussions ended without a transaction. People familiar with the matter said Athene was one of the interested parties.

Source: Wall Street Journal

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