First quarter reports on annuity sales will start rolling out soon. As usual, annuity wonks will pore over every single figure. But probably no results will get more scrutiny than the ones from Athene USA, the big jewel in the crown of a holding company the industry had not even heard of five years ago.
Athene USA is the West Des Moines, Iowa, carrier formed last year when Athene Holding Ltd. of Bermuda completed its storied acquisition of fixed index annuity (FIA) heavyweight Aviva USA. The holding company has since combined that business in with the fixed annuity business of three other U.S. operating subsidiaries, now boasts $61 billion in management assets, projects retail fixed annuity assets approaching $3 billion annually, and writes through about 20,000 producers.
The company’s creation has been a whale of a tale, with regulators challenging the holding company’s ties to private equity, the holding company agreeing to certain conditions, FIA sales at the target company falling as negotiations dragged on, employees losing jobs or quitting, new hires coming on board, and a smaller subsidiary — Athene Annuity & Life (Athene A&L) — ultimately swallowing a carrier (Aviva USA) that was nearly three times its size according to A.M. Best. The new company, Athene USA, finally won its foothold — and a big foothold at that — in U.S. insurance company lore on Oct. 2.
All this year, industry people have been buzzing about how the now-combined company is faring. On the threshold of publication of first quarter results, InsuranceNewsNet offers some highlights.
The buzz starts with sales. The company’s main product line is FIAs. However, its FIA sales were down at year-end 2013. According to sales numbers from Wink, Inc., a Pleasant Hill, Iowa indexed product analyst, Athene USA ranked in fifth place on FIA sales of more than $2.7 billion at year end. By comparison, in 2012, when Aviva USA and Athene A&L were still separate entities, Wink reported that Aviva USA was in second place on FIA sales of $4 billion, and Athene A&L was in 24th place on FIA sales of $134 million.
Athene leaders themselves appear to have anticipated the 2013 numbers. In discussing organic growth projections in a December FAQ that was released before the year had ended, the company noted that, with the acquisition of Aviva USA, “initial estimated run-rate retail volumes” for Athene to be “$2bn to $3bn annually (depending on market and rate conditions).” That $2 billion to $3 billion would be on sales of FIAs and other fixed annuity products.
AN FIA sales decline was not entirely unexpected, because many acquired companies initially see sales slump during periods of ownership transition. The Athene negotiations for Aviva went on for more than nine months, and that injected a lot of uncertainty into distribution.
But now that Athene USA is a done deal, the industry chatter is all about what will happen to Athene sales, especially its FIA sales? Hence, the anticipation over first quarter results.
In March 2014, the company gave a clue. Athene Holding was projecting annualized retail sales for fixed annuities (FIAs and others) at $3 billion. And in a March 18 document, the company noted that first quarter 2014 retail sales were “continuing momentum” as of that date.
The rating issue
While the clock ticks, the executives are talking about plans for growth … and their financial strength rating from A.M. Best. As the executives see it, the two are linked.
Here’s the backstory: The day after the holding company closed its deal on Aviva USA, Best cut the financial strength rating on the Aviva piece of the business to B++ (good) from Aviva’s former rating of A- (excellent). At the same time, Best affirmed the financial strength rating of B++ on Athene A&L (the carrier that technically swallowed Aviva USA) as well as on the other Athene annuity affiliates.
The downgrade was not a huge haircut, and it was not altogether unexpected, given that rating downgrades on newly acquired companies are not unusual. Indeed, Best cited several acquisition-related factors in explaining reasons for the action—including, by the way, “anticipated new annuity sales disruptions given the change in ownership as product changes become implemented and shared among the companies.”
Still, “we want to be higher rated,” said Grant Kvalheim, president of Athene Holding. In an interview with InsuranceNewsNet, he made no bones about that. The company intends to grow, he said. A rating upgrade is part of the plan to do that.
To that end, “we’re running Athene as an A-rated company,” said Athene USA Executive Vice President Christopher Grady in a separate interview.
The company cannot control what the rating agencies do, Grady allowed. Even so, “we believe we have a good shot of getting the rating up by the next cycle, which comes up in three review periods.”
In early April, Athene Holding moved closer to that goal. It completed a new private placement offering that raised $1.048 billion of primary equity commitments—more than twice the amount originally sought ($500 million).
The additional capital “will bolster our efforts to achieve a ratings upgrade, which will benefit our retail platform and lower our cost of funds,” Athene chief executive officer Jim Belardi said in a statement.
Tellingly, the capital raise announcement termed the raise a “pre-IPO round of funding”—a clear reminder that an initial public offering where the company is heading.
Athene wants to go public via IPO because “the regulators like it, the rating agencies like it, the consumers like it, and it provides cheaper access to capital,” Kvalheim said. “Our end goal is to create a market-leading public company in annuities.”
A lot of work needs to be done first, he conceded, but ideally, he would like it to occur “within the next two years.”
Integration and sales
Another critical piece of the growth plan is completing the integration of acquisitions. Published mergers-and-acquisitions literature makes clear that integration is not an easy process for any company, not even for small ones. In Athene’s case, it is a massive undertaking.
Athene Holding has bought four companies since its creation in 2009. These are Liberty Life and Investors Insurance Corp., both in 2011; Presidential Life in 2012, and Aviva USA in 2013. So the leaders are not strangers to integration.
But the Aviva USA purchase was the biggest buy of the four, making the integration process considerably more involved. Asked how it’s going, Rod Mims, senior vice president and national sales manager at Athene A&L, credited staff with being “incredibly positive” and possessed of “a can-do attitude.”
That’s probably good, because Athene is combining not only operations and processes, but also office locations, staff relocations, staff additions and more. The sales force is being integrated too. For instance, the company intends to have all agents, regardless of original company affiliation, moved onto the same Athene contract. But they’re not there yet. According to Grady, the goal is to have that completed within 18 months or so.
When the agency forces are fully combined, the result will be a “robust agent base,” Mims predicted. Athene is “excited” about that, he said, because “Aviva brought in many more agents and many more people to talk to.”
Athene USA is also integrating the internal sales staff and leadership in the Iowa office (the former home office for Aviva USA). Twenty-seven are now on the team, and that will grow “as we grow into other distribution channels,” said Mims. There are also seven “relationship managers” in the field.
The reference to “other distribution channels” never fails to raise the ears of independent agents to a sharp point.
The former Aviva USA organization had sold its products through independent marketing organizations (IMOs) and independent agents, but Athene executives have said many times that Athene intends to pursue a “multi-channel growth strategy.” The agents keep wondering what that multi-channel strategy entails and what it will mean for them.
The answer, according to Mims, is that Athene plans to deepen its reach into the independent agent channel and to grow into other channels “as the time is right.” Athene is “110 percent committed” to the independent channel, he said, and “we’re giving it everything we have, because we have the capacity to grow there.”
Grady shed some light of the multi-channel part of the plan. That is to partner up with select IMOs, and to build a product for them to sell exclusively. Some partnerships occurred at Aviva before the acquisition, he noted. “Now, we're taking it to the next level, and succeeding at it.”
Some of the IMOs have relationships with small banks (regional and community) banks, small independent broker-dealers, and credit unions, he said, “so we can expand distribution in the independent space” and also enter those channels through them.
Does that mean Athene has no big money-centered banks on tap? “It takes a few years to get agreements in those banks … and it’s the same with wirehouses,” Grady said. “Working with the IMOs is much quicker for us.”
What about going direct to consumers? “That’s almost all technology, it’s a pretty big build internally, and it would take our eyes off the ball with our existing channel,” Grady said. By comparison, independent agents provide a “very strong consumer value proposition” for Athene.
That said, “We won’t own distribution,” Grady stressed, reiterating a point that company executives keep making. The plan is to partner, not to own.
Product line is another big piece of the integration, and of future focus. What will the products be? Where will Athene USA go with them?
For one thing, the company has moved all remaining sales from the Aviva USA brand to Athene as of March 3, 2014, Athene Holding said in an update. “Now 100 percent of sales are as Athene.” (For Athene watchers, this will make it easier to do quarterly sales comparisons this year.)
For another, Athene plans to consolidate the legacy platforms from the original companies into a full suite of products. The former Aviva companies contribute the lion’s share of FIA products, and the Athene A&L companies, most of the multi-year guaranteed annuities (MYGAs) and single-premium income annuities (SPIAs), Mims said.
For now, producers can sell the products they sold before, said Grady, “but they don’t have to sell all of them.”
As for new product innovation, Grady said “we will only innovate in the fixed annuity space. We want to be a leader in manufacturing here.” That includes the FIAs, MYGAs, and SPIAs, “and maybe book value annuities, and maybe registered indexed annuities.”
“We want to have very competitive products in the fixed space,” added Mims. The focus will be on accumulation with use of guaranteed living benefits for income.
What are definitely not on tap are variable annuities, life products, health insurance products and property-casualty products, Grady said.
Some companies want to be well-diversified, Kvalheim observed. However, that has “the presupposition that diversification is good and that you’re good at diversification. We want to be really good at what we do and focus on that.”
The private equity aspect
Kvalheim noted that the tone of complaints about Athene’s ties to private equity has changed since the company completed the Aviva acquisition last October. The noise has died down considerably, agreed Mims.
The noise was about Athene Holding’s connection with private equity investors—namely that the relationship would bring private equity’s short-term business model to an insurance company, which by its nature is long-term, and that this could diminish policyholder protections.
“I know that we’re painted with a private equity brush,” Kvalheim said, but he said the company is not private equity.
Here is the corporate lineage: Athene USA is the U.S. business of Athene Holding Ltd., a Bermuda company owned by several institutional investors. Athene Holding’s majority shareholder is AP Alternative Assets, L.P., a closed-end, publicly traded permanent capital vehicle listed on Euronext as AAA and based in Guernsey. AP Alternative is managed by Apollo Global Management, LLC, a publicly-listed firm that makes private equity investments and is headquartered in New York City.
It is the corporate link to private equity (in particular, Apollo) that caught widespread attention, to the point that regulators in Iowa and New York required Athene Holding to agree to certain conditions (such as higher reserves) before approving the deal.
Looking back on it now, Kvalheim said there was an assumption in the private equity concerns that “unsuccessful insurers were doing a good job, though they wanted out or were capital impaired.”
Athene did agree to the conditions laid out by state regulators, but Kvalheim still bristles at the idea of state regulators requiring private equity-affiliated companies to meet separate standards that do not apply to traditional life insurance companies. “We support the prudential standard, and are happy to live by it, but this should apply to everybody,” he said.
As for the criticism that Athene’s focus will be short-term, he said that is “frankly nonsense.”
Reiterating a point he has been making since last year, he said there is “no time fuse” on the money that’s in the company.
“We want to be in this business forever,” he said. “We have a great relationship with Apollo and want to make it better. … We keep acting and behaving and doing business on a long-term basis, and we think we will be in business for years to come.”
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