A merger between Bermudian-based insurers Apollo Global Management and Athene Holding has meant big gains for all sides, but the relationship is worth monitoring.

This, from Financial Times Wall Street editor Sujeet Indap in an article headlined “How financial engineering in Bermuda boosted Apollo”.

When the rival firms announced the merger in January 2022, some people called it a “strategic blunder”.

According to Mr Indap, nearly two years on, the merger is proving the naysayers wrong, with Apollo’s stock price trading at an all-time high as its assets under management have risen to $600 billion.

Mr Indap called the Apollo-Athene combination “deft”.

“Using financial engineering, Apollo created an off-balance sheet gizmo based in the welcoming climes of Bermuda,” he wrote. “The result is cheaper equity capital that has turbocharged Athene’s asset growth and, in turn, juiced Apollo shareholder returns.”

Apollo created Athene in a 2009 reinsurance trade, and then took it public seven years later.

Mr Indap said public shareholders never fully embraced Athene owing to concerns over its complexity and relationship with Apollo.

“As a result, its stock price never traded at a high premium-to-book value,” Mr Indap said.

In 2019, rather than buy Athene stock, Apollo invented a “sidecar” vehicle, ADIP, that functioned like a traditional private equity fund, calling capital only as needed, usually when Athene sought a big acquisition.

Domiciling ADIP in Bermuda allowed ADIP’s fund investors to avoid corporate income tax, moderating their return requirements.

Mr Indap called Bermuda “central to Athene’s strategy”.

“Of its $24 billion in total equity capital, $18 billion is stationed in Bermuda entities,” Mr Indap said. “Most of Athene’s annuity liabilities have migrated to Bermuda itself through reinsurance agreements.”

He said Apollo and Athene insist that the Bermuda activities have nothing to do with regulatory arbitrage.

“Rather, its capital ratios in the island nation are roughly the same as onshore in the US and that, ultimately, Apollo and Athene remain on the hook for customer obligations,” Mr Indap reported.

Athene forecasts the ADIP sidecar will help to take its gross invested portfolio to $385 billion by 2026, up from just $67 billion, ten years ago, making it a game changer in the words of management.

Athene has announced a second vintage ADIP vehicle with a $2 billion fundraising.

“It is notable that in insurance markets, illiquid and esoteric private capital somehow endures as a more efficient option than public capital,” Mr Indap said. “Athene and Apollo had themselves merged, in large part, to eliminate the inherent principal/agent inefficiencies between an insurer and an affiliated asset manager. The sidecar structure has cleverly solved a cost-of-capital challenge. But it has also reintroduced this similar tension.”