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Athene's Challenge to Prudential Could Prove Bonanza for Apollo

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Athene Holding Ltd., untested at running pension funds, wants to compete with the industry’s oldest and biggest firms.

Jumping into the business of owning retirement plans would benefit Apollo Global Management L.L.C., the New York-based private equity shop led by billionaire Leon Black. Athene, co-created by Black’s firm eight years ago, would pay Apollo to manage the pension money.

(Related: Athene CEO: IPO Timing Couldn’t Have Been Better)

Companies looking to make employee-pension funds someone else’s challenge have sold them to giant insurers such as Prudential Financial Inc. and MetLife Inc. The two firms, a combined 291 years old, are among companies leading a surge that’s more than tripled the size of pension-transfer deals since 2013. Athene is hoping that its quirkier investment strategy and tax-efficient Bermuda location will help it price deals better than the incumbents. But with a smaller balance sheet and lower credit rating, it would have to scrap to compete.

“Our competitive advantage starts with our tax-efficient structure,” Athene co-founder and Chief Executive Officer Jim Belardi said in an Aug. 10 interview. “That’s a competitive advantage in each segment that we operate in.”

Insurers are betting that their prowess at managing liabilities tied to longevity will help them oversee plans for workers at companies such as General Motors Co. and Verizon Communications Inc. But there’s little margin for error, according to MetLife CEO Steve Kandarian. Insurers have to get transaction prices right or they risk running short of cash years down the line, especially if pensioners live longer than expected or if market fluctuations hurt their ability to generate enough income.

First Deal

Athene said it won its first deal for a pension fund in the second quarter, taking on $320 million of obligations for more than 10,000 retirees. Athene President Bill Wheeler said the size of the transaction is a “sweet spot” and Athene would target pension deals of about $200 million or more. Wheeler didn’t identify the other company in the deal.

“Now it’s a matter of how many of these transactions can you onboard at once,” Wheeler said on an Aug. 10 conference call. “And you know there’s a limit. I want to test that limit and see how many we can do.”

Ben Franklin on a $50 (Image: Thinkstock)

(Image: Thinkstock)

New business means more money-management fees for Apollo. The firm earns about 40 basis points for the first $65.8 billion that Athene holds and 30 basis points for assets above that threshold. A basis point is 0.01 percentage point.

Charles Zehren, an Apollo spokesman, declined to comment.

Balance Sheet

Athene enters the competition with the burdens of an upstart. Not only does its $93.6 billion balance sheet hardly compare with the $700 billion-plus fortresses that Prudential and MetLife each command, its investment strategy varies from its peers.

“There are problems with being the new guy on the block — people don’t know you,” Wheeler said in an interview. But “we don’t have any of those old legacy problems that frankly, if you’ve been around 50 years, you’re going to have.”

Ties to Apollo

Athene’s $77 billion portfolio includes stakes in two companies that have ties to Apollo — MidCap, which specializes in asset-backed and leveraged loans, and AmeriHome, which sells mortgages. In the past, the relationship between Athene and Apollo has faced scrutiny from investors and regulators who questioned its coziness.

Of the fixed-maturity securities Athene owns, 6.6% have a credit rating below “high quality,” compared with 4.4% at Prudential and 5.6% at MetLife, according to a rankings system from the National Association of Insurance Commissioners. Some bets on alternative assets, which account for about 5% of its portfolio, have generated higher returns for Athene.

“In bidding situations we’ve been in, independent fiduciaries that review these deals have not had qualms with Athene’s investment portfolio,” Wheeler said in a statement.

Prudential agreed to take over employee pension funds from retailer J.C. Penney Co. in 2015 and $1.6 billion in liabilities from Hartford Financial Services Group Inc. this year. The insurer also owns pension funds for General Motors and Verizon. The company said that competition was good for the market and showed that interest in these types of deals is increasing.

Sears Fund

This year, MetLife took on the pension obligations for thousands of Sears Holdings Corp. retirees. Last year, the insurer teamed with Massachusetts Mutual Life Insurance Co. to assume $1.6 billion in pension liabilities from paintmaker PPG Industries Inc.

“We consider the pension buyout market to be very buoyant and we believe that will continue for the foreseeable future, drawing new entrants into the market,” MetLife spokeswoman Kim Friedman said in an email.

Department of Labor guidelines say employers should pick the “safest annuity available.” They advise pension plans to evaluate the insurer’s claims-paying ability, the size of the deal relative to the insurer’s balance sheet, and the insurer’s credit ratings. Cost can be considered, though it can’t be used to justify buying an unsafe annuity, according to the regulation.

Athene’s financial strength, according to S&P Global Ratings, is three grades below both Prudential and MetLife, though the company was upgraded by A.M. Best in April. On Aug. 16, its outlook was raised to positive by S&P, which cited the diversity of its revenue sources.

Even so, Athene could benefit from the experience of its leaders. Wheeler, whom the company credits for getting into the pension-transfer market, previously led the Americas business at MetLife, which has been in the market for years. And CEO Belardi used to lead SunAmerica, one of American International Group Inc.’s insurers.

“This is clearly a growth area for insurance companies,” said Deep Banerjee, an S&P analyst. “The management team at this company has experience in insurance, and some of them specifically in the pension-risk-transfer business.”

—With assistance from Sonali Basak.

— Read Athene Raises $1.08 Billion in 3rd-Biggest U.S. IPO of 2016 on ThinkAdvisor.

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