Apollo / Athene target $60bn of premium float with ACRA sidecar

Investor and private equity specialist Apollo Global Management and its life and retirement reinsurance company Athene expect the Athene Co-Invest Reinsurance Affiliate (ACRA) third-party capitalised sidecar vehicle could drive around $60 billion of premium float, from its initial capital pool of $3.2 billion.

The Athene Co-Invest Reinsurance Affiliate (ACRA) third-party capital backed sidecar was the first such vehicle to emerge in the life, retirement and annuities space.

ACRA operates as a kind of reinsurance sidecar, fed by an investment fund managed by Apollo, allowing investors to participate alongside the re/insurer.

As a result, it provides sidecar-like capacity to support the large reinsurance transactions that Athene enters into, with investors sharing more directly in the returns of this business.

For Apollo, the giant alternative investment manager and Athene, its reinsurance arm, these large transactions are as much about adding investment assets as assuming insurance and reinsurance risk.

Which means the added third-party capital firepower from the ACRA sidecar and its investors makes entering into these large deals less cash intensive upfront for Athene and Apollo, but the end-result is still driving significant premium float that can be put to work by the investment arm.

At the start of the sidecar initiative, Apollo and Athene had raised roughly $3.2 billion of third-party investor capital commitments for the ACRA reinsurance sidecar in 2019.

Some of the third-party capital from the ACRA sidecar to work in a massive $27 billion fixed annuity block reinsurance transaction and investment in Jackson National Life Insurance Company, part of Prudential plc, after which additional transactions came to light in which the sidecar participated, such as a $4.9 billion pension risk transfer deal for security and aerospace company Lockheed Martin.

The ACRA reinsurance sidecar has also begun to generate relatively meaningful fee income for Athene as well, contributing $22 million to its full-year 2020 earnings.

With now around $1.7 billion of ACRA sidecar capital deployed so far, this has generated some $28 billion of assets against which investors earn a spread.

With a 3 to 5 year investment period and a 13% to 14% unlevered gross target return from the Apollo/Athene Dedicated Investment Program (ADIP), which the ACRA sidecar supplies the capital for, the economics are attractive and as deployment scales up, so do the premium float assets that can be invested.

In fact, Apollo forecasts that by the time the remaining $1.5 billion of ACRA sidecar capital is deployed, it could have generated more than $60 billion of premium float.

Which is a significant amount of investment firepower.

Athene earns around a 15 basis point fee on all of the liabilities supported by ADIP and capital from ACRA, so the fees will scale with the deployment as well.

On top of this, Apollo expects that the business Athene retains will also have its ROE enhanced through the use of third-party capital.

By 2026, with future sidecars expected to be issued, Apollo anticipates that as much as one-third of its assets could be supported by the ADIP structure, which it calls particularly capital efficient.

Reflecting the real value of the ACRA sidecar and Athene’s venture into third-party reinsurance capital management using an ILS style vehicle, leveraging third-party investor capital to support the rapid build-up of additional assets under management and reducing its reliance on its own balance-sheet at the same time.

Apollo and Athene see the ACRA sidecar and ADIP investment platform as an “innovative tool to drive capital efficiency.”

Which means it makes their own capital more elastic as well, enabling it to work harder alongside the third-party investor capital.

Similar benefits to those gained by insurance and reinsurance firms that operate sidecars or insurance-linked securities (ILS) funds to augment their own balance-sheet capital.

It’s worth also pointing out that this is just from the very first ACRA sidecar raise from Apollo and Athene.

Given how successful it seems to have been for the company, you can only imagine the next may be larger and the sidecar structure will become a permanent and renewable source of additional capacity to support its reinsurance-related business.