Iowa OKs Athene buy of Aviva
By National Underwriter
By Elizabeth Festa
The $1.55 billion acquisition of Aviva USA Corp. and its subsidiaries, including Aviva Life and Annuity Co., by Athene Holding Ltd. got the green light from Iowa’s insurance regulators today. The aquisition is subject to tightened conditions and restrictions, including a review of all money exiting the annuity company, and a bolstering of reserve requirements.
Athene is affiliated with alternative investment manager (AIM) Apollo Global Management LLC through Athene Asset Management LLC.
State insurance regulators, alarmed at recent low-cost purchases of depressed annuity firms for the fast-growing indexed annuity products, coupled with their well-publicized purchases of sports and entertainment franchises with some insurance company money, are seeking to batten down the hatches in their approvals of these deals and their subsequent regulation.
The National Association of Insurance Commissioners (NAIC) is also looking into these transactions via a new subgroup.
Under the terms announced today, Aviva cannot -- without prior approval from the commissioner -- pay dividends or other distributions for five years, change its plan of operations or make investments, payments or agreements to or with affiliates.
The risk-based capital minimum level will rise to 400 percent, above the average minimum of 250 percent RBC but below the 450 percent the New York regulators are now requiring of AIMs and hedge fund annuity buyers.
Athene also had agreed to voluntarily increase policy reserves by an additional $150 million. The company will also submit to a capital management agreement for capital and surplus requirements.
Also, all non-variable deferred annuities containing guaranteed minimum death benefits or withdrawal benefits issued by Aviva beginning Jan, 1. 2014, must meet the stricter reserving standards of Actuarial Guideline 33.
Going forward, all domestic companies now must comply with AG 33 for their non-variable annuities containing these features as Commissioner Nick Gerhart has written, “any company applying for the use of Actuarial Guideline 43 for these products will not have their application approved for the foreseeable future.”
Athene, as well as others, have been using AG 43. As reported by the Des Moines Register, AG 33 is stricter and requires insurers to set their reserves for the worst-case scenario, while AG 43 is described as "less demanding and allows more money to be diverted from reserves to other uses, while requiring more capital," according to the report.
The NAIC confirmed some insurers' use of AG 43 for indexed products, stating AG 43 is "more principle-based" and AG 33 is more formula-based. The NAIC's long-term plan is to develop principle-based valuation standards for non-variable annuities. The goal is to develop a new section of the Valuation Manual that will supersede AG 33 for non-variable annuities issued after its adoption.
According to Iowa First Deputy Commissioner Jim Mumford, this will be true for domestic companies, but the division has not talked yet with non-domiciled insurers such as Security Benefit Life in Kansas, (a Guggenheim Partners company,) Mumford said.
Guggenheim bought the Los Angeles Dodgers last year for $2 billion-plus, at an inflated price, not as investment, and with some insurance company money, according to press reports. Guggenheim, which also reached a deal with New York regulators similar to Athene's and Security Benefit, have declined interviews on the subject.
The Iowa Insurance Division and the commissioner have decided they "wanted to have stronger reserves in the company,” Mumford said, describing why regulators asked Aviva to go back to AG 33. “The Company has been very cooperative. I think they have been very supportive of what we have been trying to do. I truly believe they are in for the long run,” Mumford said. The conditions basically say, “we want to get to know you better as we go along,” Mumford explained.
"If you look at this deal, Iowa and New York regulators are pretty much much together on this -- these are pretty stringent conditions," Mumford said.
On Wednesday, New York's Department of Financial Services (DFS) announced that Apollo Global Management had agreed to a set of heightened policyholder protections as part of Athene’s planned acquisition of Aviva Life and Annuity Co. of New York, including similar dividend and transactional prior approvals, plus a separate backstop trust account totaling about $35 million for additional protections.
“If they spend money wildly with purchases that aren't investment grade, we would be able to discuss that with them and make sure they change their investment practices," Mumford said. "The fact that they agreed to these conditions shows they are in for the long haul -- they really don’t have a way to get money out of the company without going by us and getting our approval,” Mumford said.
Under the conditions, all funds going out of the insurer are subject to review, even the de minimus amounts. Mumford said. “We are going to look at every inter-company transaction.”
Athene Holding Ltd. Chairman Chief Executive Officer, Jim Belardi, stated in a release, “This is a transformative event for Athene, and we intend to continue our close working relationship with the IID as we complete this acquisition and integrate the two companies.”
Belardi said in a phone interview last month that Athene, in its fourth acquisition of an insurance company (Aviva), is buying annuity players at prices that “are significantly below book value,” a discount that “we translate that to lower cost of funding or increase reserve."
The liability cost is lower “so we can invest in a very safe, liquid asset portfolio without too much risk but with appropriate yields that satisfy our policyholders and our shareholders,” Belardi said in the July 8 interview, a week or so before the public hearing in Des Moines on the Athene-Aviva deal.
The index annuity products have surrender charges “so we know the money will stay until we expect it to -- so we can invest with certainty without having to worry about surviving,” Belardi said.
The reason why the current owners perhaps cannot make such a go of it is likely because “they bought the liabilities at a higher price than we did...we have a lower cost of funds...perhaps other companies bought at higher yields, higher prices,” Belardi suggested.
Gerhart stated in his release today that, “going forward, this company will now join Iowa’s other fine domestic companies in the same pattern of required financial filings and on-site examinations with which we have maintained Iowa’s record for insurance company solvency for decades.”
Iowa has not had an insolvency since 1988.
After the expected closing of the Aviva acquisition in 2013, Athene will have approximately $58 billion of assets and $5 billion of equity capital. Aviva plc, the parent company of Aviva USA, is the sixth largest insurer in the world. Headquartered in London, it was designated a global systemically important insurer by the Financial Stability Board last month.
Originally published on LifeHealthPro.com