Scottish Re Group Ltd (fka SKRRF)

[Enterprising Investor]

Black’s Apollo Targets Fixed Annuities With Bermuda Reinsurer.

Jan. 8 (Bloomberg) -- In the 20 years since Leon Black got into the private-equity business, his Apollo Global Management LLC has made money buying companies, distressed debt and bank loans. Now, the New York-based firm is targeting fixed annuities, a $600 billion market dominated by insurers.

Apollo, working through a Bermuda reinsurer that opened last year, is guaranteeing payments on fixed annuities sold by life insurance companies, according to regulatory filings. In exchange, it invests the cash from the sales mostly in bonds and keeps any profits left after the annuity holders are paid.

The firm, started by Black in 1990, is seeking to take advantage of a capital shortage that forced some annuity issuers to turn away business in 2009. While Apollo says its investing skills are a good fit for annuity reinsurance, other money managers have lost money in the market.

“The idea is to use insurance liabilities as a cheap source of funding for an asset-management business,” Chris Stroup, chairman of Wilton Re Holdings Ltd., a Wilton, Connecticut, life-reinsurance company, said in an interview. “This is a strategy that has been attempted before and hasn’t always worked out.”

Max Capital Group Ltd., a life, property and annuity reinsurer, lost $175 million in 2008 after its portfolio of private investments dropped 19 percent. Hedge-fund manager Louis Moore Bacon helped finance the formation of Max Capital through an affiliate and remains the company’s largest shareholder, according to regulatory filings. His brother Zack Bacon was chief executive officer of Alstra Capital Management LLC, which ran Max Capital’s portfolio of fund investments from 2004 until January 2009.

Investment Losses

Scottish Re Group Ltd., an annuity reinsurer established in 1998 by Michael French, a founder of the Dallas-based hedge-fund firm Maverick Capital Ltd., realized a $979 million investment loss in 2007 on a portfolio that included securities backed by subprime residential mortgages. U.S. shares of Bermuda-based Scottish Re trade at 17 cents, compared with a high of $5.40 in 2007.

Jonathan Gasthalter, a spokesman for Apollo, declined to comment on the venture, disclosed in a Nov. 23 filing with the U.S. Securities and Exchange Commission. The move is part of Apollo’s latest initiative, the pursuit of “value-oriented” debt strategies that can outperform traditional fixed-income investments, according to the documents.

The firm’s capital-markets unit oversees $18.1 billion in credit assets, while the leveraged-buyout group manages $33.5 billion. Both have helped Black, 58, accumulate an estimated net worth of $2 billion, ranking him as the 158th richest American, according to Forbes magazine.

Bermuda Unit

Apollo formed Athene Life Re Ltd. to negotiate the purchase of annuity policies, according to the filing. Frank “Chip” Gillis, former head of insurance solutions at Bear Stearns Cos., is running Athene. James Belardi, previously chief investment officer for AIG Retirement Services Inc., heads another subsidiary, Athene Asset Management LLC.

Life insurers are the main sellers of fixed annuities, investment contracts that offer clients a guaranteed return over a set period that is typically tax-deferred. Insurers invest the proceeds from the sales mostly in debt securities with the aim of earning a higher yield and pocketing the difference.

Reinsurers such as Swiss Reinsurance Co. of Zurich and Transamerica Reinsurance in Charlotte, North Carolina, haven’t provided much fixed-annuity coverage because the profits are small relative to the capital required, said William Pargeans, a vice president at A.M. Best Co., an Oldwick, New Jersey, credit- ratings firm. Athene is the first reinsurer to focus exclusively on fixed annuities, he said in an interview.

Black’s Background

“It all boils down to the returns you can get on your investment portfolio,” according to Pargeans, who specializes in life reinsurance. “The only way margins can be better is if you are willing to take on more investment risk.”

Black, the former head of mergers at Michael Milken’s Drexel Burnham Lambert Inc., bought about $6.5 billion of junk bonds from the failed Executive Life Insurance Co. after forming Apollo. The firm has specialized since then in LBOs and debt investments, purchasing $24 billion of bank loans and more than $8 billion of distressed debt during the credit crunch that began in 2007, according to the SEC filing.

“To the extent Apollo has expertise in fixed income, this is a place for them to deploy their capital,” said John Matovina, chief financial officer of American Equity Investment Life Holding Co. American Equity transferred about $513 million of annuities to Athene under an agreement that took effect July 1, according to Matovina and a Nov. 9 SEC filing by the West Des Moines, Iowa, insurer.

Mortgage Bonds

Apollo invested at least $371 million of the premiums as of Sept. 30, with about $229 million in mortgage-backed bonds, $67 million in corporate securities and $47 million in equities, possibly including preferred stock, according to American Equity’s SEC filing.

Guggenheim Partners LLC has also put together a venture that will reinsure annuities, according to documents filed with the National Association of Insurance Commissioners in Washington. The Chicago-based money manager bought Wellmark Community Insurance Inc. in August, renamed it Guggenheim Life & Annuity Co. and is marketing annuity reinsurance to insurers.

“Athene and Guggenheim saw an opportunity in 2009 and they acted on it,” said Richard Tucker, vice president of business development at Ruark Consulting LLC, a Simsbury, Connecticut, reinsurance intermediary and actuarial consultant. “My understanding is they created the insurance companies to be another form of asset gatherer.”

Shawn Simmons, a spokesman for Guggenheim, declined to comment.

Annuity Sales Surge

Investors began piling into fixed annuities during the 2008 stock-market decline. Sales in the first nine months of last year rose 17 percent to $87.2 billion, according to LIMRA, an insurance research group based in Windsor, Connecticut.

The reinsurance frees capital for the annuity companies, allowing them to write more contracts. Because insurers must set aside capital equaling as much as 10 percent of a new annuity’s face value, some turned away business last year, said John Lenz, president of Lenz Financial Group, a Portland, Oregon, annuity wholesaler.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aKAvThrW1KSA

[It is unclear to me if there is any link between Apollo and SKRRF.]

SEC filing mentioned in story:
http://sec.gov/Archives/edgar/data/1411494/000119312509239721/ds1a.htm