(Bloomberg) -- Those dialed in for American Equity Investment Life Holding Co.’s earnings call last week all seemed to know about the abrupt resignation of a director representing the company’s largest investor -- all except Chief Executive Officer Anant Bhalla, that is.

Minutes beforehand, Brookfield Asset Management Inc. -- which owns about 18.5% of AEL -- said Chief Investment Officer Sachin Shah was resigning from the insurer’s board, citing a fundamental change in the strategic direction of the firm, and that it may sell its shares. Analysts on the conference call pressed Bhalla for details as they watched a third of AEL’s market value disappear.

“We have a very solid relationship with Brookfield. I don’t know what you’re referring to,” Bhalla said. An analyst then laid out Brookfield’s concerns from its regulatory filing. “Thank you for summarizing what you guys know and I don’t know,” Bhalla responded.

As it turns out, Bhalla had some idea of what had sparked Shah’s departure, which marked a rare instance of turmoil on public display for Toronto-based Brookfield, a sprawling asset manager that prides itself on avoiding drama. The tumult exposed a private disagreement over AEL’s then-undisclosed partnership with 26North Partners LP, a private equity firm recently started by Apollo Global Management Inc. co-founder Josh Harris.

Investors on AEL’s call didn’t know that background. Bhalla broached the existence of the 26North partnership in a seemingly impromptu way, without nodding to the tensions with Brookfield. By day’s end, AEL put out a press release disclosing an investment in 26North and a reinsurance deal with an affiliate, and that Bhalla is taking a seat on 26North’s board.

Risk Tolerance

Shah left AEL’s board over concerns that an unproven platform like 26North was too risky for the insurer’s investors and policyholders, who prefer steady, risk-adjusted returns, said people familiar with the matter.

Representatives for Brookfield and West Des Moines, Iowa-based AEL declined to comment. A representative for Harris declined to comment.

The Canadian asset manager arrived as a white knight for AEL just over two years ago amid an attempted hostile takeover by Massachusetts Mutual Life Insurance Co. and Apollo-backed Athene Holding Ltd.

Brookfield agreed to purchase a stake in AEL that would make it the insurer’s largest shareholder and thwart the buyout attempt. A five-year deal between the two companies also called for Brookfield to reinsure as much as $10 billion in existing and future annuity liabilities.

Shah, who also heads Brookfield’s reinsurance business, joined AEL’s board as part of the arrangement. Since then, AEL has continued to prioritize striking annuity deals with asset managers as a way to create a diversified portfolio and increase yield on its investments -- part of a strategy dubbed “AEL 2.0.”

‘Been Slipping’

So far, results have been mixed. Last week, AEL reported that sales fell to $752 million in the third quarter, down 42% from a year earlier, but the company also had a better-than-expected investment yield in the period. AEL’s share of the indexed-annuity sales market has been falling -- to 5.6% last year from roughly 10% in 2016, according to figures from industry researcher Wink Inc.

“American Equity’s market share has been slipping in a manner that is inconsistent with their historical rankings,” Wink CEO Sheryl Moore said in an email. “I am certain investors want the AEL 2.0 strategy unleashed.”

The question -- and the apparent source of strife with AEL’s biggest shareholder -- is whether the insurer is taking on too much risk in an attempt to boost its returns. To some, the 26North deal didn’t appear to be deviating too far from AEL’s stated strategy.

“Plainly, BAM was upset at AEL’s reinsurance transaction and responded in the most forceful way possible,” Mark Dwelle, an analyst at RBC Capital Markets, said in a Nov. 8 note to clients. “Likewise, AEL had the opportunity to do a reinsurance deal on attractive terms and chose to engage with another party, which is not precluded by its partnership with BAM.”

Harris Praised

AEL believes the deal with 26North is no different than other transactions it has struck under its strategy, or similar deals in the sector, people familiar with the matter said, asking not to be identified discussing information that isn’t public. That includes an arrangement with Pretium that saw AEL invest $100 million in the investment firm’s management platform.

Bhalla said on last week’s call that the 26North deal would help AEL source future assets and allow it to work with the talent the startup is attracting. He described Harris as “one of the foremost private equity investors in a generation.”

The 26North deal came at an unusual time in Brookfield and AEL’s partnership. After Brookfield agreed to acquire AEL rival American National Group Inc. last year, Brookfield and AEL took steps to replace Shah on the insurer’s board with another Brookfield representative due to antitrust concerns, the people said.

The two firms had been working toward a joint announcement about the transition -- tentatively slated for this week -- before their dispute over 26North escalated, the people said.

Disclosure Unplanned

Shah was excluded from AEL board meetings in September, when the 26North transaction was reviewed, while the perceived antitrust issues were being resolved. He did, however, catch wind of the potential deal through back channels and repeatedly urged Bhalla to abandon it, the people said.

Shah’s concerns were largely ignored, and Bhalla said he wasn’t planning to discuss the new reinsurance deal on AEL’s third-quarter call -- until analysts quizzed him about Brookfield’s concerns.

Fears that similar antitrust restrictions would be placed on Shah’s replacement, along with the perceived shift in AEL’s strategy, ultimately led Brookfield to vacate the board entirely, the people said. Under the terms of its arrangement with the insurer, Brookfield can sell only 9.1 million AEL shares -- nearly 60% of its stake -- at the end of November, and can’t sell the rest until January 2024.

The dispute with Brookfield has weighed on AEL’s shares, which closed down 21% the day the news hit. The stock has recovered somewhat since, buoyed by a buyback program announced Friday for an additional $400 million of its shares.

Dwelle, the RBC analyst, said he’s inclined to let the dust settle and see how the situation will progress. 

“At this point the shares have already responded and we think the reaction has been disproportionate to the probable near-term impact on AEL and its business model,” he said in his note. “That said, the loss of a respected partner isn’t a positive for AEL either. We’re inclined to stand pat for now.”

(Updates with Harris declining to comment.)

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