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American Equity proposal fits with MassMutual's, Athene's growth pursuits

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American Equity proposal fits with MassMutual's, Athene's growth pursuits

Renewed speculation about the future independence of American Equity Investment Life Holding Company involves a unique proposed structure that aligns well with the current aspirations of each of the suitors.

Massachusetts Mutual Life Insurance Co., which would purchase American Equity Investment Life Insurance Co. and its insurance subsidiaries, recently agreed to sell its retirement plan business in a development the company said would accelerate its plan to strengthen its position in the U.S. protection and accumulation industry.

Proposed holding company purchaser Athene Holding Ltd. would reinsure 80% of the balance sheets of American Equity Investment Life and its subsidiaries, fulfilling its ongoing desire for inorganic expansion that meets targeted return hurdles.

Both companies possess substantial dry powder for such a transaction. The offer letter, which was dated Sept. 8 and made public Oct. 1, indicates that MassMutual maintains "substantial excess capital to support future growth." That position will be further fortified upon the company's receipt of the $2.35 billion ceding commission from the retirement plan deal with a Great-West Lifeco Inc. subsidiary. Athene said it holds more than $3 billion of excess capital on its balance sheet with further access to $3 billion of undrawn capital in the Apollo Global Management Inc.-managed Apollo/Athene Dedicated Investment Program through its Athene Co-Invest Reinsurance Affiliate 1A Ltd. subsidiary.

The proposed structure has MassMutual retaining the employees, distribution, brands and infrastructure of the target. MassMutual envisions that existing American Equity Investment Life management would continue to run the business, which would remain focused on the fixed indexed annuity market.

As part of a combination that the proposed acquirers described as "mutually complementary," MassMutual would benefit from the target's products and distribution relationships with insurance marketing organizations and independent advisers, while American Equity Investment Life could accelerate the expansion of its distribution into the bank and broker/dealer channels.

MassMutual and American Equity Investment Life at the group level generated direct first-year and single premiums of $4.79 billion and $4.86 billion, respectively, from ordinary individual annuity business in 2019. While that constituted virtually all of American Equity Investment Life's production, it represented just over one-third of MassMutual's first-year and single premiums. Indexed annuities accounted for only 6% of MassMutual's $2.06 billion in net individual annuity premiums in 2019.

Athene's name had previously surfaced in connection with May 2018 media reports that American Equity Investment Life had retained an investment bank to consider strategic alternatives.

Rather than acquiring the company in its entirely, the proposed transaction would effectively allow Athene to attempt to replicate the success it previously achieved through reinsurance deals involving certain businesses of Voya Financial Inc., Lincoln National Corp. and, most recently and significantly, Jackson National Life Insurance Co. The Bermuda-based Athene Life Re Ltd. agreed in June to fully reinsure $26.72 billion of in-force fixed and fixed indexed annuity liabilities on a funds withheld coinsurance basis in exchange for a ceding commission of $1.23 billion, according to Jackson's most recent quarterly statement.

American Equity Investment Life and Athene Life Re already maintain similar agreements dating back multiple years.

The companies entered two funds withheld coinsurance agreements in 2009 whereby American Equity Investment Life ceded to Athene Life Re 20% of certain indexed annuities issued during that calendar year and 80% of multiyear guaranteed annuities to be issued from July 2009 through December 2013.

Effective in 2014, the parties entered a modified coinsurance agreement covering the following liabilities: 80% of multiyear guaranteed annuities issued directly by American Equity Investment Life and assumed from its Eagle Life Insurance Co. subsidiary from January 2014 onward; 80% of certain American Equity Investment Life indexed annuities issued from August 2016 through December 2016; and 100% of the fixed indexed annuities that American Equity Investment Life assumes from Eagle Life.

In modified and coinsurance with funds withheld arrangements, the cedant retains legal possession of the assets backing the affected liabilities but transfers the asset and liability risks, Athene explained in a July presentation.

American Equity Investment Life reported just over $979 million in funds withheld under coinsurance and a modified coinsurance reserve of nearly $3.26 billion as of year-end 2019 through its various arrangements with Athene Life Re. The company also maintained noteworthy reinsurance agreements at that point with EquiTrust Life Insurance Co. Inc. and Hannover Life Reassurance Co. of America, the former involving certain early-2000s-era annuities and the latter associated with future lifetime income benefit rider payment claims and select other risks.

"Our preferred way to grow is exactly like we did with Jackson: a block reinsurance deal," said Athene President, CEO and Chief Investment Officer James Belardi during an August earnings conference call. "We don't need the infrastructure, people, etc. But we're flexible."