Alarm sounds on bid for Aviva

July 18, 2013 by Victor Epstein

Apollo accused of shifting assets in ways that put policyholders in jeopardy

Union representative Jim Baker was outnumbered at Wednesday’s state hearing on Apollo Global Management’s $1.8 billion bid for West Des Moines-based Aviva USA, but that didn’t stop him from sounding the alarm on the managed equity fund.

The proposed deal could boost Apollo’s assets by about 49 percent to more than $170 billion and make its Athene insurance arm the second-largest issuer of fixed annuities in the U.S. But some government regulators are worried that the private equity industry’s focus on short-term gains is incompatible with the long-term investing approach of most insurers.

Baker, the research coordinator for the Unite Here union, provided data to support those concerns at a time of increasing national interest in Apollo’s bid for Aviva. Locally, those concerns must be weighed against the need to create and retain Iowa jobs — a task for which fast-growing Athene seems ideally suited.

“There’s a broader conversation happening within the insurance industry, which is whether or not regulators like Iowa Insurance Commissioner Nick Gerhart will put in place the appropriate standards to protect policyholders from these private equity firms,” Baker said in an interview, noting that annuity holders are “sitting ducks” without them.

Apollo is one of the world’s largest equity management firms, with more than $114 billion of assets.

Unite Here represents 275,000 workers in the casino, hotel and food service industries, including 20,000 at Caesars Entertainment, which was purchased by Apollo and another private equity fund for $17.7 billion in 2008. Apollo has pulled $345 million out of the casino company in transaction, asset management, advisory and monitoring fees since then, according to Baker, who said it could do the same thing to Aviva USA.

In remarks that charged the 78-minute-long hearing at the Iowa Insurance Division, Baker said Apollo drained $20 million from Athene via fees in the first quarter, even though it controls the company. Apollo is funneling the insurer’s assets into riskier investments, including a piece of Caesars’ casino business, subprime mortgages and a railroad in Kazakhstan, he charged. He also projected that Apollo’s fees to Athene will accelerate to $296 million a year if the acquisition is approved.

Athene President Grant Kvalheim, who was accompanied by at least five Apollo representatives, said he applauded the Iowa review process. He summarized the reasons Gerhart should approve the deal.

“We’re going to grow this business. We’re in it for the long haul,” Kvalheim said, noting that the $18.8 million Apollo casino investment Baker cited was shifted to Athene in exchange for new shares of the insurer. “We have no interest in acquiring equity in gaming companies, and it will be liquidated and redeployed.”

Athene has vowed to move its operational headquarters to West Des Moines from South Carolina if the deal is approved, expand the business here and be a good corporate citizen. It has purchased three other companies since 2006 and remains in acquisition mode, which could lead to even more jobs in West Des Moines as it uses Apollo’s deep pockets to buy other insurers.

Neither Kvalheim nor Athene Chief Executive Officer Jim Belardi plans to move to Iowa if the purchase goes through.

Des Moines is one of the largest hubs for U.S. insurance. The industry employs 24,100 people in the metro area.

Kevin Freese, a 42-year-old investment manager in Urbandale who attended Wednesday’s hearing, pointed to concerns over private equity groups’ insurance asset purchases.

“If we don’t handle this well as an industry, we could find ourselves in real trouble a decade or two down the road, in much the same fashion as what happened with the big banks,” Freese said. “The insurance industry has traditionally been a very conservative industry, and we need to protect policyholders. Just look at what happened at AIG.”

AIG received a $182 billion bailout from the federal government in 2008, after its derivative investments backed by subprime mortgages declined in value.

The New York state superintendent of financial services, whose team is reviewing Apollo’s acquisition of a small piece of Aviva USA in New York, has threatened to scotch the entire deal if Apollo doesn’t agree to new rules to protect shareholders.

Gerhart, who asked Apollo about those concerns Wednesday, has 30 days to reach a decision on the Aviva deal at a time when Iowa Gov. Terry Branstad has placed a premium on attracting new jobs to the state.

The grounds for Gerhart to reject the deal include whether it would limit competition in the Iowa insurance industry or put policyholders in jeopardy. Other criteria include the competence of the buyer’s management team and its resources. The only area in dispute is the safety of policyholders.

A negative verdict seems unlikely, given that all three of the bidders for Aviva USA were private equity firms. The losing bidders, Guggenheim Partners and Harbinger Capital, were likely to generate the same concerns as Apollo.

Aviva: Annuity giant

Aviva USA is one of the largest issuers of fixed annuities in the U.S. The long-term investment tool is popular with retirement planners because it returns a steady stream of income to policyholders after an initial period in which insurers invest the principal. However, it can take decades for an annuity to run its course, and policyholders can be left with only a portion of the money owed them when the issuer goes belly up. Annuity principal is treated as an investment asset by insurers like Aviva USA, which has $56 billion of assets under management.

Originally Posted at The Des Moines Register on July 18, 2013 by Victor Epstein.