The potential for sales-related synergies contributed to parent-subsidiary relationships between select life insurers and consumer finance companies decades ago. Now, as most recently demonstrated by Athene Holding Ltd.'s proposed acquisition of a majority stake in home improvement lender Aqua Finance Inc., investment synergies are at the root of a new sort of convergence.
Access to direct origination platforms confers a competitive advantage to insurance companies during a time in which attractive new money investment yields remain difficult to find. Those benefits may be individually incremental but collectively meaningful. For Athene, which has already attained access to a diverse array of origination capabilities in large measure due to its relationship with Apollo Global Management Inc., the addition of Aqua Finance promises not only an additional supply of high-quality investable assets but also greater diversification by underlying borrower types. It also will benefit from Apollo's management expertise in the specialty finance arena. What might appear to casual industry observers as an unusual marriage from an operational standpoint makes perfect sense in a financial context in the current environment. |
Life insurers such as Transamerica Corp., American General Corp., Prudential Insurance Co. of America and the predecessor to Principal Financial Group Inc. all maintained significant consumer lending and/or residential mortgage operations during at least part of the 1990s, most of which they later sold in whole or in part as the notion of financial services convergence fell out of favor. Conseco Inc., a life and supplemental health insurer, memorably touted "extensive cross-marketing opportunities" when it agreed in April 1998 to acquire manufactured housing finance company Green Tree Financial Corp. in a stock deal initially valued at $7.35 billion.
But rather than a means to cross-sell indexed annuities to consumers borrowing funds to pay for kitchen remodeling or vice versa, the pairing of Athene and Aqua Finance offers a further boost to the acquirer's already significant access to differentiated investments.
Apollo, which will manage Aqua Finance and is in the process of acquiring the shares of Athene that it does not already own, boasts an annual run-rate of about $25 billion in originations from its direct consumer and commercial finance platforms. Its five-year target for originations from those platforms is $60 billion or more, according to an October presentation. These figures do not include the annual run-rates of $40 billion and $15 billion, respectively, in originations in Apollo's traditional private credit business nor its high-grade alpha business.
Key Apollo direct origination platforms include middle-market commercial finance company MidCap Financial LLC, specialized aircraft and aircraft engine lender PK AirFinance SA, collateralized loan obligation manager Redding Ridge Asset Management LLC, aircraft lessor Merx Aviation Finance LLC, Australia-based commercial real estate investment manager MaxCap Group Pty. Ltd., automotive fleet manager Donlen Corp., real estate investment and advisory firm Net Lease Capital Advisors Inc., U.K.-based asset finance company Haydock Finance Ltd and, subject to pending acquisitions, U.S. nonagency residential mortgage lender Nexera Holding LLC, which does business as Newfi, and U.K.-based mortgage lender Paratus AMC Ltd., which does business as Foundation Home Loans. The Apollo slide deck listed consumer finance among various "whitespace" opportunities as it pursues greater diversity by asset class and geography.
Like the Aqua Finance deal, Foundation will be acquired by Athene under the terms of a July agreement and managed by Apollo post-closing.
Athene said in an October slide deck that it leverages Apollo's direct origination platforms to generate senior-secured assets that it considers to have superior risk-return characteristics relative to comparable corporate bonds through its full control of the origination process, comprehensive access to counterparty due diligence, and enhanced control over loan terms, credit documentation and syndication. From a yield perspective, the company targets outperformance through those platforms of between 100 and 200 basis points over liquid corporates.
As it stands, Athene reported that related party investments of $29.11 billion as of Sept. 30 constituted 12.9% of its total assets. Of that amount, $8.06 billion pertained to securitizations of unaffiliated assets where Apollo is the manager and $2.34 billion involved strategic investments in the Apollo direct origination platforms. The largest portion, $12.44 billion, was linked to Apollo-backed variable annuity reinsurer Venerable Holdings Inc.
Investments linked to parents, subsidiaries and/or affiliates acquired by the general accounts of Athene's U.S. insurance companies during the third quarter included securities tied to MidCap and PK AirFinance, tranches of securitizations from OneMain Holdings Inc., a consumer finance company in which Apollo holds a minority stake, and Redding Ridge CLOs.
Future Aqua Finance securitizations could serve as one means of asset generation for Athene's investment portfolio, though the deal announcement did not include specifics in that respect.
Data contained in an October Kroll Bond Rating Agency report showed that Aqua Finance had sponsored $1.92 billion in term securitizations, most recently the $759.5 million Aqua Finance Trust 2021-A. Additionally, the company had cumulatively sold $3.7 billion of loans to third parties, including through a partnership with Wausau, Wis., neighbor Connexus CU.
The securitization program has attracted broad participation from within the insurance industry, though not yet from Athene. S&P Global Market Intelligence estimates that U.S. property and casualty and life insurers purchased in the primary and secondary markets $450.7 million in Aqua Finance paper between Nov. 17, 2017, and Sept. 30, 2021, including $105.9 million from the 2021-A transaction. Large holders include Liberty Mutual Holding Co. Inc. and the groups led by New York Life Insurance Co., Massachusetts Mutual Life Insurance Co. and American Family Mutual Insurance Co. SI.
Aqua Finance generated $1.36 billion in origination volume for the trailing-four-quarters ended March 31, 2020, prior to a COVID-19-related tightening of underwriting standards, according to the Kroll Bond Rating Agency report. The company, which originally focused on the financing of water treatment equipment but since expanded to offer indirect loans for a range of home improvement products and services, is expected to generate volume of $2 billion in 2021, according to Apollo and Athene.