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​Are we seeing a déjà vu moment from the Junk Bond days?

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Category : research
Published Date : 10/10/2024

In 1991 Executive Life (EL) Insurance was seized by the California Insurance Department due to its large exposure to junk bonds. EL was effectively a captive of Drexel as they participated in 90% of Drexel’s deals and 60% of EL’s assets were junk debt.

Circling around the failed Executive Life were several former Drexel executives. They were well placed to bid on the insurer as they were intimately involved in the very junk bonds that caused Executive Life’s collapse.
Partnering with French bank Credit Lyonnais, the ex-Drexel execs formed a new company and purchased Executive Life at a rock bottom price. That transaction proved hugely profitable and created an instant track record that catapulted the company into the private equity elite.
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That firm, Apollo Global Management (AGM) and their Athene Insurance sub may trigger a deja vu moment when one considers the history of Executive Life. Athene is 100% owned by AGM and has contributed more than 50% of AGM’s growth and earnings. Athene has over $200B in assets, nearly 3x the level of 2019.
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This post is a preview of a more detailed article I will publish in coming weeks.
I have been covering the private equity ecosystem since 2020. The connections between Apollo and Athene and the large exposure of retirees (via annuities and pension risk transfers) warrants a deep dive into Athene.
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Athene is exhibit A of the growing penetration of PE into insurance.
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Below I highlight several concerns. Penetrating the various complex Athene legal entities presents particular challenges to independent analysts. So I humbly present this as an area of future exploration and discovery and hope my network offers counterpoints, validation and other avenues of exploration.
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1) Large market share: Athene’s business model of paying attractive rates has resulted in an outsized market share with 42% greater share in fixed annuities than the next largest insurer (see image of fixed annuity 2024 market share). Athene also claims #1 share in pension transfers and funding agreements. Market dominance in financial services is often a red flag.
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2) Assets: To pay attractive rates Athene needs to earn excess returns. Athene has significant exposure to risky (though mostly IG) assets including private credit (25%), Commercial Real Estate (15%) and CLOs (10%).

3) Opaque captive Bermuda Re-Insurer: 80% of Athene’s capital is via a captive Bermuda reinsurance sub.
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4)    Conflicts of Interest:33% of Athene’s recent $83B investments were Apollo originated and Athene’s assets are managed by an AGM subsidiary.
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5)    Liquidity: Athene faces potential liquidity issues on both the asset and liability side of the balance sheet. On the liability side, annuities and funding agreements present some redemption risk and aside from $44B public corporate bonds it’s likely that Athene’s assets would have challenging liquidity in a distressed environment.​
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​Are we seeing a déjà vu moment from the Junk Bond days?