Apollo Global Management Inc has been telling investors and analysts in the last few days that its reinsurance business Athene does not face the risk of a run on its annuities akin to how deposits fled some U.S. regional banks.
Apollo shares have lost 15% of their value since the banking crisis started on March 8, a greater drop than experienced by major peers Blackstone Inc, KKR & Co Inc and Carlyle Group Inc.
In a quarterly update to shareholders published on March 13, Apollo outlined how Athene's funding model is different than a bank's. Most of the annuities that Athene provides cannot be surrendered by their holders, it said, and Apollo called its balance sheet a "fortress" that can withstand withdrawals from those who have the right to pull their money.
Annuities are financial products purchased for a lump sum or through installments in exchange for a fixed stream of payments over time.
They are typically offered by insurance firms. Apollo, one of the world's biggest private equity firms, helped launch Athene in 2009 and has used the capital raised from the annuities offered to earn lucrative fees and grow its assets beyond its traditional funds.
In the wake of the banking crisis, however, Apollo has been fielding questions from analysts and investors about Athene's funding model.
"Now that we are seeing runs on select U.S. regional banks, we're also starting to see some investors voice those same concerns about insurance firms. What's going on in regional banks is like a wakeup call," said BMO Capital Markets analyst Rufus Hone. Following a meeting with Apollo executives, Hone wrote in a note last week that he does not anticipate a spike in withdrawals from Athene's annuity holders and that Athene's funding base was stable.
An Apollo spokesperson said Athene had ample cash and liquidity and that its issuance of new annuity policies "meaningfully" exceeded the policies that matured and other withdrawals.
Apollo said in its March 13 presentation to investors that it had seen inflows of $8.8 billion to Athene from the start of the year to March 10. Outflows have been consistent with the quarterly average of around $5 billion, a person familiar with the matter said.
Athene's estimated liabilities stood at $184 billion as of March 10. About 82% of those annuities are not at risk of withdrawal by clients, either because their terms make them non-surrendable or financially onerous to surrender, or because the holders are insurance firms rather than individuals, according to the Apollo presentation.
But annuities worth about $33 billion, equivalent to 18% of Athene's liabilities, are not protected by surrender charges, making them easier to be withdrawn by holders.
Questions from investors and analysts to Apollo have focused on this subset of annuity policies that have a potentially higher flight risk.
Sticky assets
Apollo in the presentation gave several reasons why annuity holders are less likely to withdraw their money than bank account holders, including that annuities are long-term investment products that are typically used for retirement and offer higher returns than traditional bank products.
Apollo also said it had $73 billion in available liquidity as of March 10 to meet any potential spikes in demand for annuity withdrawals, including a $56.9 billion fixed-income portfolio comprised mostly of publicly traded investment-grade corporate bonds.
Apollo would likely have to realize losses if it sold some of that portfolio given that the rise in interest rates in the last few months has led to a general drop in the value of bonds, said Argus Research analyst Stephen Biggar.
Other insurers that are major providers of annuities, including American Equity Investment Life Holding Co, have also seen a drop in their market capitalization in the wake of the banking crisis.
Wells Fargo analyst Finian O'Shea said he did not believe Athene's business was currently at risk because withdrawals from annuities remained limited. But he said the fallout from the Federal Reserve's push to raise interest rates as well as the recent collapse of some U.S. regional banks prompted some Apollo investors to raise concerns about Athene's balance sheet.
"It's not a right-now thing. People are thinking about it for more down the road -- if interest rates keep going up that Athene's surrender levels on annuities could go up," O'Shea said.
