Subject: BNRE reverse exchange
Brookfield Reinsurance Ltd. is asking its shareholders -- many of whom hold a small number of shares as a result of BNRE's spinout two years ago -- to approve the issuance of almost 102 million exchangeable shares that would be available to BN shareholders on a 1-for-1 basis during an offering or offerings in the 12 months following BNRE's Aug. 17 annual meeting.

BNRE shares are already exchangeable for BN shares, an arrangement intended to prop up the nascent insurance business's stock while it developed its business. As a result of this "paired" arrangement, the two stocks generally trade within similar ranges. The June 2021 spinout to create a ticker for an insurance/reinsurance/annuity business that barely existed at the time was very small, producing a BNRE share count of just over 10 million.

The company needs shareholder approval for the plan because the Toronto Stock Exchange requires it "where the number of securities issuable exceeds 25%" of the issuer's outstanding securities at the time. If it were approved and all the reverse-exchangeable shares claimed, the BNRE share count would increase by about 1,000%, to ~112 million. The exchange process is intended to prevent any dilution to BN shareholders as the exchanged shares would simply change tickers.

In theory, the slight premium BNRE shares have generally enjoyed over BN shares due to the original "paired" exchange provision would provide an incentive for reverse exchanges, but the premium is unpredictable and usually very small. In fact, at Friday's close, BN was trading slightly higher than BNRE, making any reverse exchange a money-loser.

It's understandable that Brookfield would want "to increase the equity base and market capitalization" of the insurance sub from its tiny starting point, but it's not clear what the incentive will be to participate in these reverse exchanges. BNRE is based in Bermuda, so the reverse exchanges might appeal to investors in tax havens who are subject to unrecoverable withholding taxes by the Canadian government on their BN dividends. Exchanging them for BNRE shares would eliminate this withholding penalty.

But BN and BNRE both pay pretty puny dividends following the BAM spinout ($0.28 per year at present, a yield of 0.8%), so an entity would have to exchange a pretty hefty block of BN to make it worthwhile. Assuming the proposal passes, and Brookfield big whigs control enough BNRE shares to make it a pretty safe bet, it will be interesting to see what the uptake rate is. Maybe it will be the big whigs themselves who take advantage. It would not be the first time a spinout or arcane stock swap worked to their advantage.