A private equity firm that is acquiring Aviva's annuity business has agreed to comply with heightened capital standards in connection with the acquisition.
The acquisition is being made by Athene Holdings, which is controlled by private equity firm Apollo. The decision of Apollo Global Management LLC (Apollo) to accept the heightened consumer protection was announced by Benjamin Lawsky, superintendent of the New York State Department of Financial Services (NYDFS).
In an investment note prompted by the agreement, Sterne Agee & Leach analysts in New York said Thursday that Athene’s pact with New York state regulators regarding its acquisition of Aviva USA was in line “with our expectations,” and “clears one of the few remaining hurdles before the closing of the transaction,” said analysts Jason Weyeneth and Alex Levine.
They also said the Aviva acquisition should add at least $250 million of annual pre-tax earnings to Athene’s parent, Apollo. The analysts said Athene’s acquisition of Aviva USA is a “key driver” to their belief that Apollo 2014 earnings will be more than 20 percent above the consensus for all analysts which cover Apollo.
At the end of 2012, Des Moines-based Aviva was ranked as the third largest underwriter of fixed-rate annuities in the U.S. at $4.1 billion, according to LIMRA.
Athene agreed to acquire Aviva’s PLC’s U.S. insurance business late last year for $1.8 billion, and Lawsky’s approval is seen as one of the last steps necessary to sealing the deal.
The compliance requirements are consistent with those mandated by Lawsky as part of his approval last month of Guggenheim Partners LLC's acquisition of Sun Life Insurance and Annuity Company of New York.
The protections include heightened capital standards; the establishment of a separate, additional “backstop” trust account dedicated to further safeguarding policyholder claims; enhanced regulatory scrutiny of investments, operations, dividends and reinsurance; and other strengthened disclosure and transparency requirements.
The safeguards are in addition to Athene’s earlier agreement to divest Aviva’s life insurance business through a reinsurance arrangement with Commonwealth Annuity and Life Insurance Co., a wholly owned subsidiary of Global Atlantic Financial Group.
At the end of 2012, Aviva USA’s life insurance line held approximately $10 billion of statutory admitted assets, which included business written by Aviva Life and Annuity Co. and Aviva Life and Annuity Co. of New York.
Lawsky saw the heightened capital requirement as his price for allowing private equity firms to acquire annuity companies, either directly or indirectly.
Lawsky wants to help better protect retirees and others receiving annuity payments. Recently, the DFS voiced concern about a spike in private equity firms and other investment companies moving into the annuity business.
This trend raised concerns since such firms typically have a more short-term-oriented business model than traditional insurers, and the annuity business is focused on ensuring long-term security for policyholders.
In disclosing the agreement with Apollo, Lawsky said that, “We’ve worked to build a new model for policyholder protections that will help address the emerging trend of private equity firms and other investment companies entering the annuity business.”
He said that, “When it comes to these sorts of deals, we need to ensure we are putting retirees who depend on these annuities first.”
Lawsky added that the NYDFS is “pleased that Apollo worked with us to reach a resolution that provides enhanced safeguards for policyholders so this transaction can proceed.”