Apollo to Guggenheim Seek Annuity Windfall Insurers Missed

Leon Black’s Apollo Global Management LLC private-equity firm and asset manager Guggenheim Partners LLC are betting they can make a windfall on annuities as insurers scale back from the retirement products.

Black has called annuities and insurance a “hidden” asset that can provide funds to invest and boost fees at his New York-based firm. Apollo and competitors may get more chances to add such holdings because life insurers are seeking to cut risk tied to obligations that weigh on profit when interest rates are low.

The annuity business is either “structurally busted, or these are the deals of the century,” said Randy Binner, an analyst at FBR Capital Markets. Buyers are wagering “they can manage these assets more effectively with more aggressive investment strategies and more aggressive tax strategies than insurance companies can.”

Apollo’s Athene unit agreed to buy four insurers since 2008. That includes the $1.8 billion deal in December that valued Aviva Plc’s U.S. life and annuity business at about 60 percent of statutory capital surplus, a measure of assets minus liabilities used by regulators. The purchase will boost Athene’s assets to more than $60 billion from about $13 billion.

The agreement with London-based Aviva, announced Dec. 21, is the largest disclosed U.S. annuity deal since the 2008 financial crisis, according to data compiled by Bloomberg. The second biggest was reached the same month, when a firm owned by Guggenheim shareholders agreed to buy a variable-annuity unit from Toronto-based Sun Life Financial Inc. for $1.35 billion.

‘Next Frontier’

“Private buyers see more value in life and annuity businesses than does the public market,” said Sean Dargan, an analyst at Macquarie Group Ltd., in a Jan. 16 note. “Variable annuities are the next frontier.”

Annuities provide a steady source of income and can benefit investors as they leave the workforce. There were 39.2 million Americans aged 65 and older in 2011, compared with 32.6 million in 2000, according to Census Bureau data. The U.S. Treasury Department last year moved to make it easier to add annuities to retirement plans

Fixed annuities offer a stream of payouts at a set rate. In variable contracts, savers have the potential for higher returns if stock markets gain, and can lock in minimum returns. The guarantees burned insurers that failed to anticipate the risk that equity markets and bond rates would fall.

More than $200 billion in variable-annuity account value may be available for sale as companies like Manulife Financial Corp., Hartford Financial Services Group Inc. and Genworth Financial Inc. seek to cut risk from the products, FBR’s Binner has estimated. Carriers had $2.8 trillion in reserves for annuity contracts in 2011, according to data compiled by the American Council of Life Insurers.

Meaningful Opportunities

Global firms may seek to divest U.S. insurance business to help meet regulators’ new capital requirements, Goldman Sachs Group Inc. said in a document this month for potential investors in the bank’s Global Atlantic reinsurer. The unit, which backs risks taken by insurers, may have “meaningful acquisition opportunities,” according to the presentation. Michael DuVally, a spokesman for Goldman Sachs, declined to comment.

Transfers may benefit sellers while pressuring the creditworthiness of insurers being acquired by asset managers, Moody’s Investors Service said in a note today.

‘More Aggressive’

Buyers “may adopt more aggressive risk, capital, and investment management strategies,” Moody’s analysts led by Weigang Bo said. Asset managers “are more likely motivated by financial rather than strategic considerations, often focused on an intermediate-term exit, and may seek to extract dividends from the life insurer.”

U.S. annuity sales to policyholders fell to $240 billion in 2011 from $265 billion in 2008 as life insurers cut benefits after interest rates fell and liabilities climbed on the products, according to industry group Limra. Annuity providers add to profits when they earn a higher rate investing funds than what they credit to policyholders.

“We have a long track record of managing and running that type of business through all different economic cycles and interest-rate scenarios,” James Belardi, Athene’s CEO, said in an interview.

Athene is among Apollo’s “hidden assets,” Black, 61, said at a conference in December, before the Aviva deal was announced. About a third of Athene’s cash can be invested in Apollo funds, helping boost fees, said Black, the former head of mergers and acquisitions at Michael Milken’s Drexel Burnham Lambert Inc.

European Debt

Athene has invested in Apollo leveraged commercial mortgage-backed-securities vehicles, a life settlements fund, and a European senior debt fund, according to a filing that Apollo Capital Management LP made with the U.S. Securities and Exchange Commission on Jan. 7.

Charles Zehren, a spokesman for Apollo, declined to comment, as did Genworth’s Julie Westermann. A spokeswoman for Toronto-based Manulife didn’t return a message.

Hartford had $77.7 billion in U.S. annuity customer account balances as of Sept. 30. The insurer took a $3.4 billion U.S. bailout in 2009 after liabilities on the contracts swelled. CEO Liam McGee, who took over that year and repaid the rescue, said he is “laser focused” on cutting variable-annuity risks.

Cutting Risk

The Guggenheim-Sun Life deal is the first involving variable annuities since the financial crisis, according to Goldman Sachs analysts.

The transaction values the U.S. business of Canada’s third-largest insurer at 1.2 times a measure of book value used by regulators, Toronto-based Sun Life said in a presentation. Assets under management in the U.S. annuities business were $37.8 billion as of Sept. 30.

Aviva had said it was eager to scale back in the U.S. to reduce volatility and avoid higher capital requirements. The U.S. unit has more than 930,000 clients for products including life insurance and annuities.

“We’re working on taking the risk down and building the capital up,” Aviva Chairman John McFarlane said on a call with analysts in November.

Philip Falcone’s publicly traded Harbinger Group Inc. bought Fidelity & Guaranty, the U.S. life and annuity unit of London-based Old Mutual Plc, for $350 million in 2011. The deal valued the business at about 39 percent of book value according to a statement at the time, as the seller worked to cut debt.

‘Heavy Discounts’

“We love to do great deals that are heavy discounts, and those are few and far between,” Gus Cheliotis, vice president and investment counsel at Harbinger Group, said in an October presentation in Chicago. Deals that meet the firm’s return-on-equity targets often involve a distressed seller, he said.

Falcone’s Harbinger Capital Partners LLC hedge fund has struggled amid lawsuits from the SEC and an investment in a wireless-communication firm that later declared bankruptcy. It managed less than $5 billion at the end of 2011, down from a peak of $26 billion in mid-2008.

MetLife Inc., the largest U.S. life insurer, has said it plans to cut variable-annuity sales for a second year in 2013.

“The riskier your overall portfolio is perceived or is, either one, whether it is or perceived, it still goes through to your stock price,” MetLife CEO Steven Kandarian told investors in May.

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