NEW YORK (Bloomberg) — Athene Holding Ltd, the Bermudian insurer that accounts for about a quarter of the asset-management fees earned by Leon Black’s Apollo Global Management, filed for an initial public offering in which some investors plan to sell 23.8 million shares for $38 to $42 apiece. At the high end of that range, an IPO would raise $997.5 million and value the insurer at about $7.8 billion, with more than 185 million shares outstanding, according to a regulatory filing yesterday.

Buyers will get a stake in a company that expanded into one of the top fixed-annuity providers in the US in less than a decade, generating $437 million of net income in the first nine months of 2016, up 37 per cent from the year-earlier period. Profits have been fuelled by returns from a $72 billion investment portfolio that includes an unusual amount of junk-rated debt and structured securities for an insurer. Apollo helps oversee one-fifth of Athene’s investments, including a slug in Apollo-related funds and businesses — casino companies, a cruise line and real estate.

Apollo counts Athene as one of its top holdings, with a stake that’s expected to be more than 10 per cent after the IPO, and reaps hundreds of millions of dollars in annual fees for helping to manage the insurer’s investments. That makes the relationship between the two firms close enough to have been questioned by regulators, investors, bankers and lawyers who’ve worked with Athene who asked not to be identified discussing clients.

“This is characteristic of many private equity firms pushing limits, here into incestuous financial relationships, with the general goal of increasing aggregate fees to the firm,” said Lawrence Cunningham, a professor at George Washington University who specialises in corporate governance.

Spokesmen for both Apollo and Athene declined to comment. Athene’s by-laws require the insurer to have a conflicts committee to review transactions between the two firms. The panel includes Hope Taitz and Marc Beilinson, who have served on the boards of other Apollo-related entities. The relationships between Apollo and Athene have benefited shareholders and policyholders, according to people with knowledge of the firms’ thinking.

Black, Apollo’s chairman and chief executive officer, told investors at a 2012 conference that Athene is among Apollo’s “hidden assets”. Apollo co-founder Mark Rowan said a year later that Athene “is the perfect vehicle, in many ways, to handle illiquidity”.

Annuities are contracts in which insurers promise a future stream of income to customers. Athene is responsible for more than one million retirement contracts in the US and is expanding in Europe. The company can boost profit by expanding the gap between what it earns on investments and what it guarantees to policyholders.

Compared with other sources of funds for private-equity firms, Athene can be a durable source of income. Rivals including Blackstone Group LP have watched Apollo’s success with Athene and have considered creating their own insurance firms, according to people familiar with their planning.

“Athene has really come out of nowhere,” said Dan Jones, a managing director at FTI Consulting who focuses on the insurance industry. “Their growth has been remarkable.”

The rate of earnings on investments was 4.65 per cent in the nine months through September, up 34 basis points from a year earlier, chief executive officer Jim Belardi said in a conference call this month. That’s similar to MetLife, which is the largest US life insurer.

At the upper end of the price range, Athene would be valued at more than 40 per cent above book value, a measure of assets minus liabilities. Older and larger annuity sellers, such as Lincoln National Corp and American Equity Investment Life Holding, trade below book value, as does MetLife.

“We believe we have fewer legacy liability issues than our peers given that all of our retail and flow reinsurance liabilities were underwritten after the financial crisis,” Athene said in the filing. “The majority of the liabilities we acquired through our acquisitions and block reinsurance were acquired at a discount to book value.”

Athene and Apollo will stay connected after an IPO. Athene has said in regulatory filings that Apollo and related entities will keep 45 per cent of shareholders’ voting rights. Athene will not receive proceeds from the sale, according to the filing. Selling shareholders include a unit of the Ontario Teachers’ Pension Plan Board and the Teachers Retirement System of Texas, both of which will retain part of their holdings.

In a filing, Athene said that Apollo’s interests “may conflict with those of other shareholders and could make it more difficult for you and other shareholders to influence significant corporate decisions.”

The ties between the companies have already drawn the anger of investors in an Apollo entity. Athene this year loaned $175 million to help Apollo combine two of its mortgage ventures. At the same time, the insurer took on $1.1 billion worth of residential mortgage-backed securities, a bundle of which were below investment grade, as part of that deal. A group of shareholders of an Apollo entity sued, alleging Athene was among companies that “aided and abetted” a breach of fiduciary duty, according to court documents.

The loan was repaid. The lawsuit is ongoing. The Apollo entity said it will vigorously defend itself.

Part of Athene’s success has come from buying home-mortgage bonds at distressed prices after the 2008 financial crisis. About 27 per cent of Athene’s assets are in real estate-related holdings, according to an IPO filing. Of that, 30 per cent are home loans below prime.

Athene is invested in two other ventures, AmeriHome Mortgage Company and middle-market lender MidCap, that also have ties to Black’s firm. MidCap’s book of loans and other assets have more than tripled to about $7 billion since early 2015. Apollo said it expects assets of MidCap, which is a source of long-term capital, to eventually reach more than $40 billion.

Apollo also generates money from Athene by taking incentive and other income from AP Alternative Assets, a $3 billion closed-end fund Apollo manages that’s Athene’s largest shareholder. AP’s sole interest is in Athene, and AP has climbed 82 per cent from the time it started trading on Amsterdam’s stock exchange in 2006 through Friday.

Athene ensured that much of Wall Street would also have a stake in its initial success. The insurance company hired 22 banks, led by Goldman Sachs Group, to manage the IPO. Typically, there are 16, according to Freeman & Co. The list in yesterday’s filing doesn’t include Apollo Global Securities, which was listed as an underwriter on earlier documents.

Athene expanded so rapidly in part due to Apollo’s takeover prowess. Deals were shepherded by Apollo senior partner Imran Siddiqui, according to people with direct knowledge. Siddiqui is also on the insurer’s board. In 2013, Athene quadrupled in size when it bought the US life and annuities business from London-based Aviva Plc for $2.6 billion. The acquisition came with accounting issues, since resolved, that delayed an Athene IPO planned for November 2015.

Athene realised some of its global ambitions last year when it agreed to buy German subsidiaries of Delta Lloyd. That added more than $5 billion of assets to its balance sheet.

In the last three years, Delaware’s insurance commissioner and the New York Department of Financial Services have looked into the risks of potential conflicts between Athene and Apollo. Athene satisfied Delaware’s demands, according to a person familiar with the insurer.

In New York, Athene came under informal review by the state regulator after it took an equity stake tied to Caesars Entertainment Corp, the casino operator partly owned by Apollo. The agency was concerned policyholders would be exposed to the gambling firm’s debt. The review didn’t yield any actions, said two people familiar with the regulator. Beilinson, a director at Caesars Acquisition Co, is on the board of Athene, while Williams Capital Group, the investment bank run by Caesars Entertainment director Christopher Williams, is listed as an adviser on the IPO.

Apollo doesn’t usually disclose Athene’s contribution to its bottom line. But in the first nine months of 2014, Athene generated $408 million, or 32 per cent, of Apollo’s revenue, according to an investor presentation. Last year, as the owner of Athene’s investment-management arm, Apollo collected fees of more than $225 million, according Athene’s IPO filing. That’s compared with Apollo management fees of $912 million last year.

On about one-fifth of Athene’s holdings, Apollo charges even more, including incentive fees that can be as high as 20 per cent of the investment gains. Apollo earned $322.6 million in incentive and management fees from Athene in the first nine months of this year.

“The strategy of this company and how it’s run is very different from other insurance companies,” said Deep Banerjee, an analyst at S&P Global Ratings.