Analysts: Private Equity Eyes American Equity

On the surface American Equity isn’t a prime candidate for a sale, so why has the company emerged as a rumored takeover target?

It’s a question that analysts are puzzling through.

American Equity, based in West Des Moines, “doesn’t strike us as a company looking to sell,” but the fixed annuity space has attracted interest from private equity players in particular, according to KBW analyst Ryan Krueger, in a research note.

“We’d put private equity at the top of the list, as they’ve been attracted to the growth opportunity from sticky, spread-based insurance liabilities,” Krueger wrote, referring to assets with stable prices.

Krueger described American Equity's fixed indexed annuity business mix as having "a superior track record of growth and returns, earning an 11 percent ROE before tax reform and 14 percent currently."

Buyers could include new private equity companies looking to replicate the Athene-Apollo and the F&G Life-CF Corp/Blackstone model of years past, private PE-backed life insurers, or public PE-affiliated life insurers, Krueger wrote.

Even Jackson National has mentioned fixed annuity M&A interest, Krueger wrote.

American Equity confirmed last week that it is in preliminary discussions regarding a sale, but there’s no guarantee talks will continue, or that “any definitive agreement will be reached,” the company said in a statement.

The company declined to elaborate.

At Least Two Suitors Mentioned

News reports last week named two possible suitors: Athene and FGL Holdings.
Recent acquisitions have helped Athene grow into the No. 2 player in the indexed annuity market with a 9 percent share.

“Athene has been public in their desire for additional opportunities for acquisition,” said annuity market expert Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of Wink’s Sales & Market Report.

Notwithstanding American Equity’s Eagle Life subsidiary, which distributes annuities through banks and broker-dealers, Athene and American Equity “don’t have a ton of synergies,” as products and distribution are similar, Moore said.

A transaction with FGL Holdings, parent company of Fidelity & Guaranty Life in Des Moines, and F&G Re Ltd. In Bermuda, might make more sense. FGL Holdings would like to expand its distribution into the bank and broker-dealer channels and there’s a starker difference between F&G Life and American Equity in terms of product and distribution groups, analysts also said.

American Equity and Fidelity & Guaranty Life target middle-income retirement investors.

In 2008, American Equity diversified distribution beyond independent agents and launched Eagle Life to sell annuities through banks and broker-dealers, a channel which has grown steadily in market share over the past five years.

Improving Operating Environment

Beyond the mechanics of an individual transaction with American Equity, the economic environment surrounding the indexed annuity sector is attractive now for two reasons, said analyst Mark Hughes of SunTrust Robinson Humphrey.

• Companies such as American Equity with large investment portfolios create opportunities for buyers to reposition assets for higher yields as interest rates rise while at the same time generating plenty of fee income.
• Indexed annuity sales, which saw first quarter sales rise by 11 percent over the year-ago period, are expected to grow again in 2018 with the demise of the Department of Labor’s fiduciary rule.

American Equity overall sales are rising. The company reported 2018 first-quarter net income of $141 million compared with net income of $54 million for the first quarter of 2017.

A rising share price could also entice senior management at American Equity to sell.

“With American Equity already briefly trading at $34-$35 in January, we suspect the higher-end of $35-$42 would be necessary to entice a sale,” Krueger wrote.

American Equity stock closed Wednesday at $35.57.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.