John Golden, Partner, Global Head of Financial Regulation: We’re seeing a contagion risk right in front of our eyes, in the Cayman Islands.

Mike Downing, Co-President of Athene USA & Chief Operating Officer of Athene Holding: Let's have an exciting conversation about insurance.

John Golden: Happy to. Always.

Mike Downing: One of the topics I want to get into is Bermuda. Talk a bit about how far back Bermuda's insurance history actually goes.

John Golden: Bermuda has been around for a long time. For the last 50 years, it's been a very major jurisdiction and the largest reinsurance jurisdiction in the world. So it's a massive organization, massive country for pooling of reinsurance risk and raising capital from global capital sources to fund, ultimately, risk around the world. It has a very stable environment.

Mike Downing: Yeah. And there's been a lot of talk around offshore insurance and the concerns about offshore. And granted, Bermuda is an island. It is offshore. But what makes it different than, kind of, the connotation of offshore?

John Golden: The question is offshore to what, right? I mean these are countries, right? So the question you kind of start with: what is the disposition of the country and the regulator around the types of financial business that they want to do? So Bermuda has been around, as we've talked about for a long time. So what does that really mean?

In the in the U.S. space, that means it's a reciprocal jurisdiction, which means it set itself up for supervisory oversight, capital and transparency and governance consistent with U.S. standards. And they've managed to do that also with European Solvency II equivalence, which is a very difficult feat to actually, to be equivalent to both jurisdictions and be to be feasible for business from both jurisdictions.

So, at Apollo and Athene, we're a full taxpayer with respect to the business that we have offshore, but we're able to raise capital with foreign investors in a way where they're paying the corporate tax, but there isn't a dividend withholding tax that would have to be paid if we were to create the same business in the U.S. That is a very meaningful difference in terms of return outcome and the difference between being able to raise capital for U.S. policyholders and not raise capital for U.S. policyholders.

Mike Downing: Part of what I hear you saying is you talked a lot about capital and it being a key place for capital to come in. I think one of the things that is kind of behind your point is when you look at the $4 trillion retirement gap, there's not nearly enough capital in the U.S. to support that growth.

John Golden: Absolutely not, yeah.

Mike Downing: So we have to tap global sources and the most efficient place for that to go is in a place like Bermuda.

John Golden: That's absolutely right. For us to raise that amount of capital from foreign sources that would be subject to a what is a very, very high withholding threshold, that was set many decades ago for other reasons, would be cost prohibitive. So what we're looking at is a retirement gap.

Pensions are no longer providing the level of guarantees across the system. Social Security is not providing enough income. So the U.S. life sector is one of the best places in the world to get a guaranteed income option like an annuity. There's just not enough capital that you could raise through the U.S. market in that way. Bermuda is solving that gap for us. The U.S. regulators know that. The government knows that.

Mike Downing: So Athene has long been a leader in transparency and bringing more transparency into the underlying details of what underpins our balance sheet and creating detail that nobody else actually provides today. There's been a fair amount of criticism in certain offshore jurisdictions about the lack of transparency.

John Golden: When you really understand what does transparency mean, you have to get behind that question. What are companies filing with the regulator? What are they making available to consumers? What are they making available on their website? What's required of the regulatory environment? And what you'll see is the amount of information that's going into that system and coming out in those different lenses is exactly the same as what's going on in the U.S.

The U.S. regulators can get all of the exact same information they're getting from their own domestics from the Bermuda Monetary Authority by asking. The regulatory regime in Bermuda is highly transparent and is very, very committed to transparency overall.

Mike Downing: Let's get a little bit more specific and just talk about Cayman. Cayman is a clear example of a less strong jurisdiction. And what are some of the risks of Cayman’s balance sheet getting bigger?

John Golden: Look. Start with the U.S., right? So, the U.S. is a system where you're making long-term promises to customers in a way that is regulated by regulators. And that is a system of trust, right?

When you move offshore, that requires the regulator to then understand what's happening in the offshore jurisdiction because that person's money and the guarantee that we're promising are now subject to that other regulatory environment. So when you think about what Bermuda has done, they have implemented consistent regulation and bilateral relationships with U.S. regulators to ensure that that promise is no different than what you get in the U.S. — no different in terms of total capital available, no different in terms of information that you’re going to get, no difference in terms of risk management and risk guardrails or governance, all of the things that need to go into a regulatory environment to ensure safety.

The issue that we have with the Cayman Islands is that none of that has been done in a consistent way. It's all arguably done in a much lower way depending on the company. We call this, “choose your own adventure.” You know, you have a company that says, I want to change this regulation or I don't want to do that regulation, or maybe I need to hold lower capital for this deal.

All of that is potentially on the table. All of that leads to a weaker regulatory environment in the aggregate. And ultimately, when you look at the growth of the Cayman Islands, that is, I think north of $150 billion right now, it's a hockey stick of growth.

It's adverse selection. You're seeing companies go down there with transactions that can't get done in Bermuda. They're just literally going down there so they can have lower regulatory requirements. That reverts back to the U.S. That is a trust issue for us. If you have a jurisdiction that chooses to allow for that, how do you trust that jurisdiction?

So really this is a U.S. problem that needs to be solved with regulatory rules and oversight saying, “We will not allow a country or jurisdiction or a regulator to essentially have systematically a lower level of guardrails in place.”

This is about consistency, a level playing field, and ultimately maintaining the trust that the consumer has for us. If we don't maintain that trust, we don't have a system, we don't have a company. And so that's why this is such an important aspect for us.

Mike Downing: And if we drill down a little bit more on some of the regulatory environment that might be a little bit more opaque or the rules may not be as strong, is there any kind of contagion risk to the industry of a weak regime, even if it doesn't impact Athene?

John Golden: You know, we're seeing contagion risk right in front of our eyes in the Cayman Islands. All you have to do is compare the Cayman Islands supervisory regime to the U.S. or Bermuda across the major things that matter – solvency, transparency, governance, risk management, these types of fundamental regulatory policies. You're seeing less in each one of those categories and sometimes drastically less and depending on the company and the situation.

That's a problem that is becoming a very, very large problem in the aggregate, one that we are worried might be correlated. So if you start to see failures of companies that are in weaker jurisdictions like the Caymans, that could happen in a correlated way. And if it does happen in a correlated way, you're talking about very, very large numbers.

When offshore companies become insolvent, those liabilities revert back into the United States. So this is a this is a problem where if we don't have a systemic solution to people that don't want to play by global standards, then we're going to keep seeing this. You know, we've been big advocates of a consistent approach to reinsurance and jurisdictional arbitrage, one that will incent countries to do the right thing by having consistent standards and effectively being consistent across all the different risk layers that I talked about, in particular, solvency.

Mike Downing: So, John, connect the dots for me between, you know, the policy implications to the company, and then ultimately, what are the implications to the policyholder or the people that we are trying to protect.

John Golden: The way reinsurance works is it transfers risk between two companies. And so a U.S. company transfers risk to a Cayman company. If that Cayman company doesn't have enough capital to pay that risk, it declares insolvency. Those liabilities don't go away. So if you have an annuity to a U.S. company that's reinsured, that policy just comes right back to the U.S. company. Except for it comes back without the money to back the policy.

So that U.S. company then needs to put up capital against that policy, needs to put up reserves. If it doesn't have enough money, it will declare insolvency. So we call that the cascading failure effect of risk of reinsurance. And it's very, very, very rare. But in situations where you have a systemic, essentially reduction in capital across types of companies, that's the thing that the insurance industry worries about.

But the impact to you is that if your company goes insolvent as a result of this cascading failure, then you have to go to what's called the guarantee fund. This has a real impact on U.S. policyholders, especially given the size that's going on right now.

Mike Downing: So really, it could really destroy confidence.

John Golden: Oh, absolutely.

Mike Downing: And a key element of our retirement promises is one of trust, right? The policyholders trust Athene to manage their money appropriately and make good on our promises, some of which are due over 30 or 40 years. And when you see other companies offering the exact same promise and backing it with a lot less capital, they're basically making the same promise without putting as much safety behind it. And that creates risk.

John Golden: Absolutely. Look, and I think there's something to be said about our stewardship role here. As the company that really started structural shifts in the U.S. life sector, we view this very personally. We want companies that are following our business models to do so responsibly.

But when we start to see people cutting corners, that bears on us directly, not only financially but reputationally. There is a line at which you know it becomes arbitrage, and we want to make sure that line does not get crossed.

Mike Downing: Right. And the stewardship extends beyond even Athene. That requires full trust in the system.

John Golden: And that starts with a stable and consistent regulatory system that doesn't have, you know, wide gaps that are sitting in front of your eyes. At the end of the day, what we're really talking about here is the Cayman Islands putting U.S. policyholders at risk, at large. We're talking about the system and the reputation of the industry. It's a serious risk. This is not a joke. And we need to take that seriously with regulatory policies that prevent this from happening.

Mike Downing: Completely agree. And not only is it a Cayman risk, then if and to the extent it’s Cayman—

John Golden: It calls into question the entire the safety of the entire system. We have to think about the system we're in. We have to think about all the policyholders in the aggregate. At some level we're stewards to everybody, even other people's policyholders, right? And that's what this is all about. You look over the large companies in the U.S. life sector have been doing this for a hundred years. We're no different. We're looking over the shoulder and we're thinking about putting ourselves in the shoes of the regulators. We’re saying, “Where is the real risk?” It’s not little risk. Where is the big risk and where do we need to spend our time and effort to make sure those big risks don't come to fruition?

Mike Downing: I think Athene together with Apollo have been a good representative of a steward.

John Golden: We’re doing our best, for sure.