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Deal sealed

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The announcement on Oct. 2 that Athene Holding Ltd. (Athene) had closed its acquisition of Aviva USA corp. resulting in the newly formed Athene USA was not a surprise to anyone. The deal had been closely monitored by the press, industry analysts and regulators with most concluding that the acquisition, announced Dec. 21, 2012, would take close to a year to complete, though it only took nine months.

Athene, who has made four acquisitions within the past two years, knew the mechanics behind such a deal and anticipated finalization happening around this time. The rather complex transaction, which drew in regulators from NY, Delaware and Iowa, was taking place while Athene was simultaneously selling Aviva USA’s life insurance arm to Global Atlantic Financial Group.

Overall, the deal played out as expected although the purchase price, originally set at $1.55 billion, closed $800 million higher. According to Aviva plc., the higher price was due to the repayment of a $290 million dollar loan coupled with estimated earnings and other improvements in statutory surplus between June and September of this year.

The end result is Athene USA, operating with the 11 largest sellers of fixed annuities in the U.S. now under its wing and roughly $60 billion in assets, is one of the largest fixed annuities companies in the U.S. National Underwriter Life & Health recently spoke with Grant Kvalheim, president Athene Holding, about the acquisition, private equity companies in the annuity arena, the future for Athene USA and the overall state of the industry.

Kvalheim, who has a background in international investment banking and came to Athene in January of 2011 after serving as co-president of Barclays Capital, wound up in the industry after fostering a 25-year personal and client relationship with founder James Belardi. His individual experience culled from a career straddling regulators in both the U.S. and Europe gives him a unique vantage point regarding regulation in both areas and what the two can learn from one another. “I think there is an effort to harmonize regulatory regimes around the globe, although I think that effort still has a long way to go,” Kvalheim said. Harmonization in the U.S. still has significant hurdles between state and national jurisdictions — something he believes will take some time.

The state-by-state regulatory environment in the U.S. is something Athene has been intimately acquainted with over the last year. Athene Holding is owned by several institutional investors, the largest of them being AP Alternative Assets L.P., a closed-end publicly-traded permanent capital vehicle managed by Apollo Global Management, LLC, an alternative investment manager.

There has been much speculation regarding the intentions of private equity firms purchasing distressed annuity firms for their indexed annuity products. Some analysts contend that the long-term dedication required for the business is an odd fit for private equity firms, known to chase after short-term returns.

State regulators from both Iowa and NY have approved the acquisition only after Athene agreed to comply with heightened capital standards, tightened restrictions and certain conditions connected with the acquisition. Notably, Athene voluntarily agreed to increase policy reserves by an additional $150 million.

Kvalheim feels their eager acceptance with all of the conditions is symbolic of their commitment to the business in the long-term. “There’s been a lot of talk, most of it misinformation. When people talk about private equity ownership, the implication is that it is money coming from a private equity fund that has a time fuse on it,” he said. “There is not a single dollar invested in Athene that has a time fuse on it or comes out of a fund with a time fuse on it. That’s always been the case in Athene’s history. The equity that is in Athene is permanent capital, the same way the equity in any other insurance company is permanent capital. We are in it for the long haul. The proof is in the pudding and if people want to doubt they can doubt but when you look at the industry over the last couple of years, nobody else but private equity has been stepping up to put capital in this industry, nobody.”

And the reason Athene is in the business at all is because they are confident in the long-term viability of the annuity industry. Kvalheim acknowledges challenges such as the low interest rate environment and the clouds of misconceptions that hang over industry but feels that Athene is positioned to overcome these hurdles. Athene’s discipline when pertaining to asset liability management has left them “not that fussed” about the low interest rate environment. “We try to run our business on a rate neutral basis,” he said. “I think we are quite different from others because we are willing to sacrifice a bit of current yield and hold a fairly high percentage of our portfolio in floating rate securities precisely because we don’t want to be in the interest rate forecasting business.”

Kvalheim does acknowledge, however, that it is hard to convince people to purchase a fixed product when interest rates are as low as they are and would welcome a somewhat higher interest rate environment. He also sees a durable opportunity for the industry in the shift from defined benefit plans and to annuity-type products. Athene has been monitoring the trend and listening to the conversations and is working to position itself to take advantage of it. “We would like to capture our share of the business,” he said.

Kvalheim feels the acquisition leaves Athene USA with a bright future. The scale, operating strengths and people that are a result of the deal gives them a strong platform from which to build. For the immediate future, the work being done will be the heavy lifting that accompanies putting businesses together and having them operate as one. He sees a complete transition into one new entity taking around one year to be fully realized. The focus is now is on integration and cohesion.

“This is a business we know well,” Kvalheim said. “There is a lot of capital leaving the industry. So, we see an opportunity to come in and become a factor in a business that a lot of people don’t like but, we like it.”


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