Paul Ricard: Welcome to a special edition of the Reinventing Insurance podcast. I'm your host, Paul Ricard. Our partner team gathered for a global meeting in New York, and we held a series of fireside chats with senior leaders in the insurance and asset management industry. Mick Moloney, our Global Head of Insurance Asset Management and Actuarial at Oliver Wyman interviewed Sean Brennan of Apollo-Athene. Sean is a partner at Apollo and Executive Vice President Head of Pension Group Annuity and Flows Reinsurance at Athene.
Private equity-backed firms have become a major player in the insurance industry, turbocharging the asset management-led insurer model. One of the most prominent examples of this model is Apollo Athene. In this conversation, Sean takes us through Apollo-Athene's journey, the emerging competitive landscape, how the model is expected to evolve, and where Apollo-Athene is headed next. Without further ado, here's Mick and Sean. Enjoy.
Mick Moloney: Joining me on stage here is Sean Brennan from Apollo-Athene. So please welcome Sean. So, Sean and I know each other very well. We're going to attempt to have a reasonably quick conversation about Apollo-Athene. Our preparation took a half an hour, and we got through about two questions. But I am keeping a very close eye on our clock here. I think the view generally in the industry is that Apollo-Athene is probably the most successful of what we call the asset management-led insurers and that model. We have a fair number of folks in the audience who are very familiar with it, but a good number that aren't. Can you describe the journey that Apollo-Athene has been on and why it is the model has been successful?
Sean Brennan: Yes, absolutely. Apollo is best known for private equity, but really how Apollo got its start was hybrid strategies. So, leverage credit equity and being able to really pivot depending on the capital sourced needs. Apollo Global Management developed relationships early on. They weren't the only alternative asset manager, but they were certainly one of the first and developed relationships and were consistently able to raise capital. The very strong returns helped that. And they had the discipline, which I think is important for the Athene story as well, really only deploying capital in really distressed situations. So, if you look at their out-sized returns, they come from investing in a few periods but preserving capital in a sort of Berkshire Hathaway-type of way for those really rainy days when people need it the most.
And when Jim Belardi, who's the CEO, CIO and Co-Founder of Athene, approached Apollo, the reason why we ultimately chose Apollo as a partner was in large part for that exact same strategy. We think insurance needs and the ability to grow in the insurance space are the most profound and the most return-oriented when the times for insurers are the darkest. And so, Athene was launched in 2009. One of the things Marc Rowan, the CEO of Apollo Global Management, said is, let's build and refine our credit business so that it is tailored for an insurance company. We are not trying to bolt on a sub-investment grade, direct lending type credit business onto an insurance company, but rather organically building a credit business for an insurance company. I think that makes us somewhat unique.
And when you look at the growth of Athene, you also look at the growth of the credit business of Apollo, which at this point is somewhere around 60% to 70% of Apollo's assets under management (AUM). What I think most people, if you ask them what Apollo was managing, they'd probably say 70 to 80% private equity (PE). And that's not the case. So, the Apollo has become known through the lens of Athene, but also through Marc Rowan, Marc is a credit-oriented asset manager for whom a lot of that credit is actually investment grade.
Mick: The two pieces that I think were relevant along the journey are at one stage Athene itself was a publicly quoted company and then the remainder of it got brought back into Apollo. And then also the evolution in the model that I think you were very early into of having like sidecars in Bermuda. Can you go through both those pieces?
Sean: Yes, I'll start with Athene. And I mentioned I joined to start an institutional business for Athene. It's probably the reason why I joined period is because Athene started saying in order to get better ratings, we can't just be an inorganic insurance company, our growth has to be organic as well. We acquired Aviva's US business in 2013 and said, let's actually invest and keep that retail business around as an important part of organic growth. But that wasn't sufficient. Rating agencies wanted diversification and rather than getting into non-spread liabilities, we said we like plain middle liabilities, but we want to expand our distribution profile. And that's why we got into the pension risk transfer (PRT) business and that's why we've spread our flow business around.
Athene went public, but what was quickly identified as a sort of weight on the share price was probably a combination of things. I'll go back to that inorganic mentality and save capital from a rainy-day mentality, which I think in an era where insurance companies were not reinvesting capital but giving it back to shareholders, it wasn't a particularly popular model. And then I think from us on the inside, we always felt the alignment between Apollo and Athene, but I think the outside perception and investor perception was that the share price was being weighed down by the perception that Apollo and Athene weren't aligned. So that if Athene's share price or solvency was in question, Apollo would still do fine, but Athene obviously wouldn't. So, the merger, which I think was very strategic also benefited the idea and addressed the idea of misalignment. It has been pretty profound for the share price since then.
And actually, the success of the model has been validated by our performance since January 2022, when we merged. But part of that partnership and the alignment extended beyond assets under management (AUM), extended beyond Apollo's ownership of Athene, but the ability in Apollo's track record of raising capital was profound for Athene. At a time when Athene was saying, ‘we don't want to raise equity capital because it's way too expensive and we don't want to be beholden to the debt capital markets because our strategy is to deploy capital.’ So you don't want to rely on debt. And what were we going to do? Well, obviously there had been precedent outside the life and annuity industry, but Apollo and Athene got together and said, ‘why don't we try to raise outside capital?’ We don't think the appetite for insurers or its lack of appetite for insurance equity is because of the insurance risks or the asset risks, we think it's because of a number of other reasons. And so why don't we offer that directly to... you can think about it as an uncorrelated or an alternative to fixed income, fairly attractive returns with very low volatility.
And we launched our first sidecar, which at the time was really intended to support inorganic growth. We think of PRT or pension risk transfer as sort of a hybrid of organic and inorganic. It happens consistently but not radically throughout the year. If a large transaction happens in May, we want to be able to have capital instantly available for that. That model and we did a $30 billion or approximately $30 billion reinsurance transaction with Jackson National Life Insurance company, did a number of other reinsurance transactions and quite a bit of pension business. And that model was a successful one at the time, since then obviously as many of you will know, the inorganic blocks out there look much wonkier, they're liabilities we don't necessarily like. We found partners to take on some, but I think in many cases the market has gotten so crowded for others in the reinsurance space that we just have to pivot to a different model.
And the last thing I'll say is, we've leaned into the organic model and the ability for that outside capital to get consistent returns and dividends by supporting our organic channels in addition to inorganic as they arise. That’s been a really important part of our growth story, not just Athene, but for Apollo as well.
Mick: If you think about where you're focused on taking the model next, what are those areas?
Sean: So, I think globally there are all kinds of numbers around this sort of global retirement crisis, but what is very clear is that the US I think will be an exporter of product development ideas. The needs are fairly consistent, the regulations are different. So where can we provide the sort of core competencies where I would say probably five years ago it would've been capital and yield, and now I would very much add product development. Our US retail experience, our US institutional experience has made it very clear that we can bring ideas globally in markets that have very nascent annuity markets and that also are starved for capital and yield. When you look at those, we are increasingly looking outward from the US saying we have strong businesses within the US, but we would be limiting ourselves if we didn't look more globally as well.
Mick: I had a couple of conversations with CEOs recently painting a picture for any spread-heavy business, particularly in the US and also in other geographies, the world was converging on a place where it was either an asset management-led insurer or a mutual holding that risk. And as a result of that a lot of the incumbents are busy setting up sidecars, setting up relationships with others intended to provide asset management capabilities into the structure.
It's a two-part question, do you see the world going that way, too? And then how do you think about the competitive landscape as these folks are trying to converge on your model and how that will shake out?
Sean: Yes, it's a great question. We think about it all the time. And there are former Oliver Wyman partners who are leading businesses that are increasingly or key strategic inputs to businesses that we have traditionally considered traditional, but we've had a lot of stones thrown at our model over the years. If you look at the traditionals in the space, and I include MassMutual, Prudential as two very prime examples, they're looking increasingly like a theme, particularly Prudential. And Principal Financial is obviously unique, but the idea that capital is scarce in the public markets, it's hard to get, it's expensive and it's unreliable. The idea that the liabilities for these insurers were considered lower risk because they had diversified risk sources. I think both of those issues have been addressed by converging to the Athene model. You've got Martello Re for MassMutual and Prismic for Prudential. The ways we approach those are slightly different, but the ideas are the same.
And I think one distinction is Apollo and Athene have so far been able to do that based on a very broad asset origination capability, an attractive liability origination platform and different insurers will get there differently. I would say the model is increasingly looking like ours, certainly in the US, but I think if you look the Dai- ichi Life Holdings acquisition of Canyon Partners recently, it's another example of where those whose core competency has been something closer to vanilla investment grade corporate, and I think are now looking for how do we get private assets and then the next step will be how do we get capital attractively priced and reliable?
Mick: It seems to me there's a significant difference from trying to bolt something onto your structure from having organically grown into something that's tightly integrated. If you think the degree of organizational knitting together that's between the two models. Can you comment on that and what do you think it means for the likelihood that some of the incumbents will succeed?
Sean: It's a great question and my last example was Dai- ichi and Canyon Partners. Canyon Partners has a great structured credit business. It's small, but that structured credit business has been strongest in sub-investment grade. If you're looking to deploy those assets towards an insurance company, Canyon will have a good head start relative to a player who has no structured credit experience. But will they have a good ability to adapt to an insurance capital regime? I think that's a question to be answered. I think you could look at Centerbridge with MassMutual and ask the same question. That's not to opine on how it's doing, it seems to be doing well. Apollo's credit business in large part grew alongside Athene and because Athene was a de novo build, it had time to get things right and develop capabilities over the time. And then Athene's alternative strategy was by asset originators. And those assets then became part of the assets Athene now invests in against the reserves. So, the ability for Athene to grow up organically and for Apollo's credit to not be demanded to be doing things that it wasn't ready to do, I think was important for our story. That's not to say that these others won't be able to do it. Obviously, Prudential has partnered with Warburg Pincus and Nomura. The idea there is to replicate that type of asset capability and fill in the holes where you're not specialized today. So, I think that the model is a good one, but it really depends on execution and how well those alternative strategies sort of step into an insurance framework.
Mick: There's a part of it which is, ‘how do I effectively compete as an insurer?’ And there's a part of it that is, ‘how do I create value as a kind of private asset manager?’ And it also seems to me from the outside, and I picked this up again from public comments by Marc Rowan, one of his comments was I want 20% of everything, 100% of nothing. So, there's also a part of it, which is that having the certainty I think in the flow coming from a balance sheet business allows me to do bigger deals with more certainty in my private business, which is a source of value there, too, right?
Sean: Yes, there's the how well adept are you at building a credit business that you acquire or that you partner with? And the second is, how important it is for the asset origination to be driven by or alongside liability origination. So, we do fantastically well at originating very chunky assets, and that's fantastic because we can deploy them against liabilities as they come up. And these liabilities are going into sidecars in the vast majority of cases. Deployment is not just going to matter in the long run, it matters in the next quarter when you're presenting results. And the ability to identify what your pipeline is on the liability side and inform your asset origination side and the reverse, I think differentiates that capability for us because we're able to step in to a good portion of that. So, to your point, we want to be 25% of everything and 100% of nothing. One way to look at that is to say ‘we want others to take on a big part of our assets.’ The other though is to say, ‘we're originating these assets because we know people will like them.’ We want to be at least 25% of those. And if you're not originating liabilities reliably, then you can't necessarily speak for those assets at the time and you might have to send more of it to outside insurers. And that balance is really important when we need the yield to originate the liabilities, but we have to know that it's coming to be able to confidently take on the liabilities.
Mick: Talk a little bit about the vision over the next decade for you. And about this view of being a retirement player more broadly.
Sean: Athene has always referred to our business as a retirement services provider. It's very clear now when you look globally and at our mission, which is to provide attractive products with attractive yield and make sure that we have capital to consistently write those products and to do that globally — we have truly become a retirement facilitator. And on the Apollo side, when you look at the ambition today, and we speak about this quite frequently, we do a lot of work around how we get the defined contribution space and the wealth space to be able to engage with private assets, the way institutional investors have historically, that's the challenge we're trying to solve. And 5 to 10 years from now, that'll be probably the lion's share of the types of assets we're originating and the types of liabilities we're writing globally, not just in the US. And then more immediately, the transition from defined benefit to defined contribution represents a very attractive opportunity not just on the pension risk transfer side, but a number of these plans, public plans are going to stay in their pension plans. Many of the answers to those challenges are going to create attractive products across that whole spectrum of individual retirees and institutions. It's reshaping the landscape there and then also trying to bring products and inform solvency regimes and capital regimes so that you can actually deliver those products in different geographies.
Mick: There were a couple of thoughts you had in particular in terms of how Oliver Wyman could be helpful as a landscape develops, and I want to make sure we get a chance to cover that.
Sean: The one that I think is an important role for Oliver Wyman to play in the insurance space and actuarial space is really around being a sort of an independent party whose voice can be trusted. It is trusted. I think the more you get out there and lend your voice to providing independent evaluation. Many look to you, value your judgment, and know you are a leader in this space. The voice is credible and important and also influential not just to regulators and traditional insurers, but we read it and say, how could we be doing things more aligned with the way they view things? That's a pretty important voice for the industry and I recognize there are times where it doesn't make money, but it's very important.
That importance is not just in getting insurers to do things right, but also getting the industry to be able to deliver value to policyholders the way we really should be. From my perspective, Oliver Wyman is relied on providing advice to insurance companies around how to replicate the model, how to build a model, and so your influence and your direction, incorporating the best things that Athene does, the best things that Prudential does, Dai- ichi, etc., and being informed on those things is integral to helping the whole industry avoid those foot faults and potentially worse.
And again, it goes back to risks, not just to asset management-based insurers or partner insurers, but also to the insurance industry. If there are failures, policyholders will stop buying products and will be afraid of the industry broadly. There are a lot of risks and Oliver Wyman is uniquely positioned to deliver advice and help construct models that are successful and not sort of prone to failure.
Mick: Sean, thank you very much. That was terrific. I suspect there are more questions in the room. Sean, as everybody knows, is joining us for dinner this evening. So hopefully, everybody will have a chance to ask any further questions and come say hi. So please join me in thanking Sean very much. Thank you, Sean.
Sean: Thank you, Mick.
Paul: For more information about our Reinventing Insurance series, you can find everything on our website at oliverwyman.com/reinventing insurance. Thanks for listening and I'll see you next time.
This transcript has been edited for clarity.
