(Bloomberg) — Marc Rowan turned the envy of the non-public fairness world together with his pioneering transfer into the insurance coverage enterprise. Now, his agency is discovering that being out entrance invitations extra scrutiny when instances get more durable.
Apollo International Administration Inc.’s 2009 entry into the sleepy world of annuities by its co-founding of insurer Athene Holding drew concern from some buyers and jealousy from rivals together with Blackstone Inc. Over the previous decade, Athene has grown into the agency’s largest revenue driver and the most important annuities supplier within the US, whereas Rowan has ascended to Apollo’s prime job.
Apollo’s wager that Athene will be smarter and nimbler than the {industry}’s incumbents now faces an enormous take a look at. Athene, which had solely identified low charges till final yr, has loaded up on structured credit score investments, arguing that companies with its experience can seize greater yields at decrease danger than comparable company bonds. The query — certainly one which faces all insurers — is whether or not debtors can sustain with debt funds as their curiosity prices climb.
At stake isn’t just the efficiency of a unit that offered nearly all of Apollo’s revenue final yr and is concentrating on a 20% leap in 2023. Any stumbles may bolster the regulators and policymakers who stay skeptical of alternative-asset managers’ push into an {industry} lengthy dominated by mutual companies owned by their prospects.
“Within the life insurance coverage and annuities enterprise, I noticed over time the shift to higher-risk, extra advanced and less-liquid securities,” stated Tom Gober, a forensic accountant who has briefed the US Division of Labor and Senate Banking Committee on non-public fairness’s involvement with insurers. “When Apollo took management of Athene insurers, the shift ramped up considerably.”
Senate Banking Committee Chairman Sherrod Brown, an Ohio Democrat, has pushed for nearer scrutiny of insurers owned by alternative-asset managers. Regulators are weighing whether or not to spice up capital necessities on holdings of collateralized mortgage obligations and different structured belongings.
“We’ve been watching all of those developments very intently,” stated Iowa Insurance coverage Commissioner Doug Ommen, a key {industry} overseer as a result of Athene and different annuities suppliers are primarily based within the state. “Our work as regulators requires an understanding of the chance posed by insurer actions of all varieties of possession. That features the impacts of the macroeconomic setting on insurance coverage firm steadiness sheets.”
Apollo, by no means identified for passivity, is assembly the issues head on. It has argued that Athene embraces a extra conservative capital method than friends. Late final yr, Athene revealed a white paper that stated regulators ought to desire its investing method, given its experience in structured credit score — which has a decrease default charge than company debt — reasonably than placing policyholders in danger by reaching for yield within the bond market.
“Our non-public credit score enterprise is totally different than most different non-public credit score companies in that almost all, and the overwhelming majority, of it’s fixed-income alternative or non-public investment-grade,” Rowan, an Apollo co-founder who took over as chief government officer in 2021, advised analysts throughout a Could 9 convention name. “This matches very nicely with the house that’s at present in retrenchment by the banking system, as a result of the banking system traditionally was not a risk-taker.”
Lively Function
Rowan, 60, stated earlier this yr that he needs Apollo to take a extra energetic function in shaping insurance coverage rules. Athene is topic to the identical guidelines as insurers that aren’t managed by alternative-asset managers. Persuading policymakers that Athene is simply as secure as friends is a key a part of Rowan’s push for Apollo, which managed $598 billion of belongings on the finish of March, to achieve $1 trillion by 2026.
Suppliers of floating-rate securities similar to structured credit score get higher returns when rates of interest rise, however that additionally means a better debt burden for debtors and larger danger that they received’t be capable to sustain with funds. Athene’s earnings from its fixed-income portfolio surged 62% within the first quarter from a yr earlier, whereas its estimated credit score losses and value of funds additionally elevated.
The insurer, which accomplished its merger with Apollo in early 2022, tasks the quantity of debt it’s unlikely to recuperate climbed nearly 10% within the three months ended March 31 to $503 million on its available-for-sale securities portfolio, which was valued at $118.6 billion. The estimate for loans deemed unlikely to be recovered ballooned 273% final yr as rates of interest surged.
Athene touts the power of its funding portfolio, 96% of which is rated funding grade by the Nationwide Affiliation of Insurance coverage Commissioners, a consortium of state regulators. Virtually 40% of these securities are the bottom stage of funding grade, whereas 46% have an A ranking or greater from the main credit-ratings companies.
S&P International Scores and Moody’s Buyers Service grades Athene’s regulated insurance coverage subsidiaries A+ and A1, respectively. The holding firm is rated A- by S&P and its unsecured debt is rated Baa1 by Moody’s.
“In an {industry} in any other case starved for capital, Athene has raised billions of {dollars} and invested in origination and structured credit score capabilities that mirror fashionable financing markets,” Apollo stated in an emailed assertion.
Athene had $20 billion in regulatory capital as of year-end.
“Right now we’re among the many best-capitalized retirement providers firms, and our capability to generate industry-leading efficiency for retirees has helped us grow to be the US market chief in fastened annuities,” Apollo stated. “We now have sturdy conviction in our mannequin and talent to efficiently navigate market cycles.”
Arms Race
Rowan was among the many first non-public fairness executives to wager on insurance coverage in 2009, when he persuaded Apollo to assist discovered Athene as a platform to purchase blocks of annuities from insurers. His pitch, following a mannequin established by conventional asset managers, was that Apollo may present insurers with higher yields with out exposing them to extra default danger.
It was a controversial wager.
The California Public Staff’ Retirement System, the most important pension fund within the US, declined a chance to put money into Athene alongside Apollo, in line with an individual with information of the matter. Calpers was involved that the tie-up would create conflicts and questions on whether or not Apollo would act in Athene’s greatest curiosity, the particular person stated. A Calpers spokesman declined to remark.
Opponents, in the meantime, eyed Rowan’s transfer with envy. Blackstone CEO Steve Schwarzman expressed frustration to associates that his agency, now the world’s largest alternative-asset supervisor, didn’t strike first, one other particular person stated.
An arms race ensued.
Non-public fairness companies pursued stakes in insurers to realize affect over how they invested and grew their steadiness sheets. Insurers struggling to generate returns within the period of traditionally low charges — ushered in by the 2008 monetary disaster — have been extremely receptive to these advances.
Blackstone took minority holdings in 4 insurance coverage companies and struck offers to handle their belongings. In 2018, Carlyle Group Inc. took a stake in reinsurer Fortitude Re. KKR & Co. turned majority proprietor of International Atlantic in 2021.
When Apollo took full possession of Athene, it turned the one alternative-asset supervisor to soak up a complete insurance coverage agency. Apollo additionally sells structured credit score belongings that it originates to different insurance coverage firms.
Early Withdrawals
The March collapse of Silicon Valley Financial institution served as a reminder of what can occur when prospects pull deposits en masse. Analysts have scrutinized insurers together with Athene in latest weeks for indicators that extra shoppers could also be cashing out early to put money into higher-yielding merchandise similar to money-market funds.
Apollo says these issues are unfounded as a result of greater than 80% of its annuities have protections towards early withdrawals, and new contracts are offsetting redemptions. The agency reported $12 billion of inflows into Athene through the first quarter — together with a report $8 billion of retail annuity gross sales — towards $5.5 billion of outflows. Simply $568 million of these redemptions have been sudden and resulted in early-withdrawal prices.
The agency forecasts $17 billion of inflows within the second quarter and for Athene to beat final yr’s annual report of $48 billion, Rowan stated within the Could 9 convention name.
“Individuals who personal annuities are saving for retirement,” he stated. “This isn’t cash they suppose is accessible. After they do give up or transfer it, they’re sometimes transferring to a different coverage.”
The give attention to how steadiness sheets will fare as financial development cools has weighed on insurance coverage shares, with the 24-company KBW Insurance coverage Index sliding 3.8% this yr by Friday. Shares of Apollo have been little modified, whereas Blackstone and KKR superior 12% and seven.8%, respectively. Carlyle slumped 8.5%.
Blackstone’s $2.2 billion funding in Corebridge Monetary, made in 2021, has misplaced about half of its worth since then, weighed down by the prospect that AIG, one other main holder, will pare its place.
Fee hikes are slowing the financial system and rippling by to business actual property, the place defaults and vacancies are rising. Insurers together with Corebridge, Prudential Monetary Inc. and Equitable Holdings Inc. elevated estimates for mortgage losses in that sector. Corebridge has advised shareholders that it’s conservative about projecting losses and constructs its business mortgage mortgage portfolio to satisfy insurance coverage liabilities.
Greater than 20% of Athene’s invested belongings are in senior actual property debt, together with mortgage loans in addition to residential and business mortgage-backed securities. On the finish of March, 12% of its RMBS and 11% of its CMBS have been rated beneath funding grade, or junk, by the NAIC.
Athene’s capability to resist — and revenue from — an financial downturn is essential to Apollo’s future. The agency, which constructed its title investing in leveraged buyouts, pulled again from the $25 billion goal for its newest non-public fairness fund whereas earnings from asset gross sales plunged 96% through the first quarter. Athene accounts for about two-thirds of Apollo’s earnings, and credit score contains greater than 70% of the agency’s belongings.
If Apollo fails to ship on its promise of providing secure, secure yield, that will harm savers who rely upon Athene for his or her retirement revenue. However the agency has sought to reassure skeptics that it’s positioned to serve retirees it doesn’t matter what occurs within the broader financial system.
“We’ve seen the impression of upper rates of interest and liquidity issues negatively have an effect on a spread of markets and monetary establishments,” Athene CEO Jim Belardi stated Thursday throughout a name with buyers. “Whereas different monetary establishments might have suffered disruption to their enterprise mannequin or development ambitions, Athene’s fortress steadiness sheet and long-running technique of working with vital extra capital actually stand out in instances like this.”
–With help from Layan Odeh.