Iowa Insurance Commissioner Nick Gerhart has had more than his share of heavy reading to do lately. 

Among the documents that he’s dug into in the past few weeks: a 1,403-page application by Apollo Management Group LLC that spells out the investment management group’s plans for acquiring West Des Moines-based annuity company Aviva USA. The acquisition would increase Athene’s assets to more than $60 billion. 

The 38-year-old attorney took the reins of the Iowa Insurance Division just six months ago, overseeing an agency that, on top of its day-to-day regulatory tasks, has a major role in preparing for the launch of the state health insurance marketplace by Oct. 1. 

The complex $1.8 billion deal, which would make Athene Holding Ltd. the second-largest U.S. issuer of indexed annuities, is the latest in a succession of insurance company acquisitions by Bermuda-based Athene, whose majority owner is an investor-owned subsidiary of Apollo. 

The transaction has also kept Aviva USA’s 1,800 employees in suspense as Athene officials weigh how to blend the companies’ operations. The majority of those people work at the company’s West Des Moines headquarters. Athene has pledged to move its headquarters from South Carolina to West Des Moines. 

On July 17, Gerhart led a public hearing in which Athene President Grant Kvalheim, whose office is in Bermuda, formally outlined its proposal for purchasing Aviva. The hearing was the most visible part of an intense legal and financial review the division is required to conduct to ensure the transaction is in the best interests of Aviva policyholders and the market. 

“It’s a team effort,” said Gerhart, who could not comment directly on any of the proceedings prior to his decision. “We have a team of financial folks who are going through the financial documents, and we have a 1,403-page Form A to go through, so we have a team looking at that. We also engage consultants; that’s part of our process to use outside legal expertise as well as internal folks.”

Significant questions remain about the potential ramifications of Athene’s ties to Apollo, a global investment company with more than $113 billion in assets under management. Regulators are concerned that Apollo’s emphasis on returning quick-turnaround profits on its portfolio companies to its private investors will cause Athene to take riskier bets with its annuity holders’ money to maximize returns, concerns that Athene executives say are unfounded. 

The transformation of Aviva USA into Athene USA “is a game changer for our company,” said Athene CEO James Belardi. “We are highly confident that we will create a top-notch fixed annuity company with Aviva.”

Who is Athene?

Athene Annuity and Life Assurance Co. is the brainchild of Belardi and Chip Gillis, two longtime insurance executives who saw an opportunity as other insurers were exiting the fixed annuity market during the financial crisis. After picking up Aviva USA’s $45 billion of fixed annuity assets, Athene expects to add between $1 billion and $2 billion annually in new annuity business going forward. 

Belardi, Athene’s CEO, was previously president of SunAmerica Life Insurance Co. and executive vice president and chief investment officer of AIG Retirement Services Inc. Belardi launched Athene in 2006 with Gillis, a former managing director of Bear, Stearns & Co. Inc., who headed the firm’s life and annuity companies. 

Athene Holding, the parent organization, made its first acquisition in April 2011 with the purchase of Liberty Life Insurance Co. in South Carolina, and three months later acquired Investors Insurance Corp. a Delaware-domiciled life insurance company. Athene completed a purchase of Presidential Life Insurance Co. in New York in late 2012.  

Athene’s track record in obtaining regulatory approval for each of those transactions in such a short period of time is a testament to his company’s depth and financial strength, Belardi said during an interview with the Business Record.  

“It starts, I think, because we have an experienced and talented management team that the regulators recognize, and we have appropriate and significant levels of capital to back the policyholder obligations that we’re bringing on,” he said. 

Regulators seeking assurances

Athene’s acquisitions are part of a larger industry trend of increased ownership of fixed annuity issuers by private-equity companies, a trend that has been concerning to regulators. 

According to Beacon Research, the total share of the annuity market controlled by issuers owned by private equity companies increased from less than 3 percent in 2011 to approximately 9 percent by the end of 2012. At the same time, private equity companies’ stake in indexed annuity sales grew from 5 percent to 15.4 percent of that specialty market.  

Because private equity companies typically have a short-term horizon for their investment holdings, the increased ownership stake has been worrisome to regulators, who are responsible for ensuring that adequate capital levels are maintained to protect policyholders. 

Apollo Global Management, which specializes in acquiring distressed companies, is buying Aviva USA from global insurer Aviva PLC for about 40 percent less than what Aviva paid for the company in 2006. Other companies Apollo has picked up in the past several years include the world’s largest casino owner, Caesars Entertainment Corp. Apollo also owns three cruise ship lines, whirlpool tub maker Jacuzzi Brands and McGraw-Hill education, in a portfolio comprised of about 40 companies.  

Gerhart’s counterpart in New York, Benjamin Lawsky, superintendent of the New York Department of Financial Services, earlier this year launched a probe into the increasing ownership position in fixed annuity companies by private equity firms.  Lawsky’s agency is also reviewing the Aviva USA acquisition because of Aviva’s  presence in that state. 

The Wall Street Journal reported in mid-July that Lawsky is likely to require Athene to agree to additional conditions for approval of the acquisition, among them holding more funds to cover its annuity obligations and maintaining a funding backstop to replenish its coffers should it run into financial trouble. Earlier this month, Lawsky’s office set such conditions for Guggenheim Partners LLC in its approval of that company’s purchase of Sun Life Financial Inc.’s annuity business. Among Lawsky’s requirements: Guggenheim will have to establish a $200 million trust account to replenish capital if it falls below required levels. 

Susan Voss, who served as the state’s insurance commissioner from 2005 through early 2013, won’t be surprised if Iowa sets similar requirements for Athene.  

“I think the thing that bothers some regulators is that you don’t know how (the private equity firm involvement is) going to affect the way they administer the insurance company,” she said. “And I think Commissioner Gerhart is going to be careful to look at that.” 

Regardless of who owns an annuity issuer, “it’s still an insurance company,” she said. “They still have to comply with all the laws and regulations on the books, whether the private equity firm owns hotels, a railroad or whatever.” 

Publicly traded company would own Aviva
Belardi said his company’s ownership structure should reassure regulators that the company is not tied to Apollo’s private equity business. Its majority owner is AP Alternative Assets LP (AAA), which is publicly traded on the Euronext exchange, he said. 

“Apollo’s private equity business has not invested anything in Athene,” he said. “It’s this publicly traded, permanent capital vehicle, AAA, that owns about 73 percent of Athene.” 

Additionally, “there is no time frame for AAA to withdraw (its investment in Athene),” he said. “There are other significant institutional investors who have a similar time frame – no set time to liquidate. They are smart, attractive partners of ours on our board, and they are helpful in running our business. Apollo in general and (AAA) in particular are committed to this enterprise called Athene that is growing in the fixed annuity business, and we expect to have them as partners for a long time.”

As of the first quarter of this year, Athene Annuity held just over 1 percent of the $7.8 billion U.S. indexed annuity market, according to Sheryl Moore, president and CEO of Moore Market Intelligence. 

The Pleasant Hill-based company’s tracks the indexed annuity industry. Athene and Aviva’s combined market share in the first quarter would have been just a shade under 8.5 percent of all indexed annuities, she said.

Athene has already announced its intention after the acquisition is approved to sell Aviva USA’s life insurance operations to Commonwealth Annuity and Life Insurance Co. 

That insurer, domiciled in Massachusetts, is a wholly owned subsidary of Global Atlantic Financial Group. Later this month, the Iowa Insurance Division will hold a hearing on that proposed transaction, in which Commonwealth seeks to purchase Athene’s Presidential Life Insurance Co. subsidiary. 

Divesting the life insurance business fits in with Athene’s strategy to focus on the indexed annuity business, Belardi said. 

Athene is already a significant player in the annuity reinsurance business, with about $10 billion of assets under management for U.S. insurers. Its largest reinsurance client is West Des Moines-based American Equity Life Holdings Co., and Belardi said that reinsurance will continue to be one of Athene’s key funding sources going forward.

Policyholder protection ‘first and foremost’ 

Belardi, a Californian with an M.B.A. from University of California, Los Angeles, said Athene’s philosophies and strategies mirror those he developed while working for Eli Broad, SunAmerica’s CEO at that time.  

Broad “was the best at making money that I’d ever met,” Belardi recalled. “He was very smart; he was able to cut through all the distractions and focus on the important things very quickly. His timing was terrific on every major transaction that he made, which is not something you can teach. He hired a group of young, fairly intelligent people and let them run with it.” 

While he was the principal financial officer at SunAmerica, Belardi developed a new industry product known as the guaranteed investment contract (GIC)-backed note, which became the principal way that Sun-America funds itself. A subsidiary of Athene will also issue GIC-backed notes to financial institutions as one source of Athene’s funding.  

Just as with SunAmerica, policyholder protection is “first and foremost” for Athene, Belardi said. 

“For the business we run, the principal risk is interest rate risk, so we try to minimize interest rate risk so the company does well in any interest rate environment,” he said.

“We’re running a net investment spread business, meaning we fund ourselves at one rate and take the proceeds and hopefully invest in a safe, conservative, liquid asset portfolio to generate acceptable net investment returns,” he said. 

Similarly, many of the limits and guidelines that Athene follows in its asset portfolio are parallel to how they were handled at SunAmerica, Belardi said. For instance, Athene’s policy is to run its U.S. insurance businesses at no less than a 400 percent risk-based capital (RBC) level. The risk-based capital ratio measures the minimum amount of capital a regulator requires an insurer to hold to support its operations and write coverage; insurers are generally subject to regulatory review for an RBC below 200 percent. In addition to selling annuities and reinsuring annuities for other companies, Athene plans to generate funds for investment by issuing GIC-backed notes and by acquiring more companies. 

In making acquisitions, “we’re going to stick to what we do well, and that’s the fixed annuity business,” Belardi said. “So you’re not going to see us buy a widget company or even getting into the property/casualty business.” 

Regarding Athene’s asset portfolio, “almost everything that we own that’s rated” is rated the two highest categories, 1 and 2, by the National Association of Insurance Commissioners, Belardi said. After the Aviva deal is closed, about 95 percent of its rated assets will fall in those two highest asset classes, he said. 

However, according to a May 2013 presentation to AAA investors by Athene, nearly 15 percent of its assets are invested in non-agency mortgage-backed securities, along with 10.1 percent in collateralized loan obligations, 8.4 percent in commercial mortgage-backed securities and 5.5 percent in alternative investments.  

Athene Asset Management, owned by Apollo and some of Athene’s management team, manages about one-third of Athene’s investments currently. One of Athene’s major initiatives will be to improve its financial strength ratings, currently rated B++ by A.M. Best Co. and Fitch Ratings Inc. 

“Our goal is to get to the A category,” Belardi said. The two biggest factors working against them are having been in business for only four years; additionally, “rating agencies don’t like change,” he said.