Latest entrant to annuity reinsurance market a product of P&C pivot

The increasingly crowded market for reinsuring in-force blocks of annuity business has another new participant — one that is well-versed in managing back books of another sort and seemingly possesses a limited mandate in the space.

Executives at Apollo Global Management Inc. confirmed in multiple forums with analysts and investors in recent days that nearly $5 billion in annuities had been ceded by the firm's Athene Holding Ltd.-led retirement services business to Catalina Holdings (Bermuda) Ltd.

That amount is insignificant relative to the hundreds of billions of dollars in U.S. annuity reserves that have been ceded on affiliated and unaffiliated bases to established market participants, those linked to other alternative asset managers like KKR & Co. Inc. and The Carlyle Group Inc., and various others. But it is symbolically meaningful in that it signals Catalina's strategic reallocation of resources away from a full focus on its current core business of acquiring and managing non-life companies and portfolios in runoff.

The winds of change

Apollo and certain Apollo-managed funds agreed in October 2017 to take a majority stake in Catalina in a transaction that CFO Martin Kelly said at the time carried "a lot of upside" given the target's leadership role in the non-life runoff market in both the United States and Europe.

"We see significant opportunity with a really limited competition," Kelly said during a November 2017 earnings conference call.

More than five years and several transactions later, Apollo management offered a markedly different perspective on the non-life runoff business. Speaking during a Feb. 9 earnings call, CEO Marc Rowan said that Apollo is in the process of revising the Catalina business model to a 50-50 split of non-life runoff business and annuity reinsurance.

"We do not believe the closed block P&C market to be that attractive," Rowan said.

Catalina has generated substantial growth in its core business under Apollo's control, however.

Data filed with the Bermuda Monetary Authority and compiled by S&P Global Market Intelligence show that its total policy reserves, which consist of outstanding losses and loss expenses along with unearned premiums, grew at a compound annual rate of 22.0% between 2017 and 2021. The expansion reflected Catalina's March 2020 acquisition of Asia Capital Reinsurance Group Pte. Ltd. as well as six loss portfolio transfers, which included 2021 transactions involving a 75% quota share of certain U.K. builders' warranty business with National House Building Council and an adverse development cover on certain PartnerRe Ltd. North American casualty business. In 2022, QBE Insurance Group Ltd. engaged in a loss portfolio transfer involving a $334 million book of North American excess-and-surplus lines business with Catalina General Insurance Ltd.

The top-level Catalina company reported life reserves of less than $5.8 million as of Dec. 31, 2021, which represented just over 0.1% of its gross reserves. It also claimed $266.7 million in structured settlement reserves, or 6.3% of the companywide gross. The Canadian branch of Catalina has assumed ownership of the structured settlements and purchased annuity contracts from life insurers to provide recurring payments to claimants.

Adding $4.86 billion in annuity reserves to the balance sheet would appear to make for a roughly equivalent split between the life, annuity and structured settlement reserves and non-life case and incurred-but-not-reported reserves when considering the 2022 addition of the QBE P&C portfolio. The $4.86 billion figure represents the amount Athene attributed to a strategic reinsurance transaction in its fourth-quarter 2022 statistical supplement.

A multifaceted approach

Disclosure of Catalina's strategic shift came as analysts sought an explanation for a spike in Athene's gross outflows, which surged on a sequential basis from the third quarter of 2022 by 58.1% to $11.06 billion. As a result, net inflows fell to only $226 million from levels of $5.00 billion or more in each of the previous four quarters. For full year 2022, gross inflows of $47.85 billion were well above gross outflows of $27.87 billion.

Rather than a spike in annuity surrenders amid rising interest rates, Rowan attributed the higher fourth-quarter 2022 outflows to the combination of "normal" surrender activity, the Catalina reinsurance transaction, and the scheduled maturity of a single funding agreement-backed note.

"It is another source of capital," Rowan said of Catalina's newfound annuity reinsurance appetite. He likened the strategy to that of the Apollo/Athene Dedicated Investment Program, or ADIP, sidecar fund that invests alongside Athene into an affiliated reinsurer in support of both organic and inorganic growth opportunities.

The first ADIP vintage, which launched with $3.25 billion in capital, has been nearly fully deployed, and Athene announced in a Feb. 9 release the first close for a second ADIP vintage with $2 billion in capital commitments. Rowan projected that ADIP II will ultimately be larger than the initial vintage and take on an increased share of the new business that Athene produces as the company seeks to fund more of its expansion through third-party capital.

Catalina will participate "side by side" with ADIP I and ADIP II, Rowan said, but he noted that the reinsurer is modest in its capital base.

"Maybe it grows to $10 billion or $15 billion over a number of years, but it is really more just a sideshow to what else is going on in the business," he said.

Prospects for heightened competition for inorganic expansion in the life and annuity space amid a number of market entries by new participants and expanded mandates for incumbents are not lost on Apollo, which continues to tout as a key competitive advantage the flexibility extended by Athene's organic origination capabilities in areas like retail annuities, funding agreements, pension risk transfer group annuities and flow reinsurance.

Rowan observed that the new players, which he did not identify by name, have been "paying up for inorganic blocks at [a] very high cost of funds ... on a hope that they will get to scale." As such, he predicted, "I believe that the vast majority of new entrants, although not all, will not be successful and we'll learn a very expensive lesson along the way."