Buyout Firms Face NY Insurance Probe Into Annuities

  • Regulators subpoena Apollo, Guggenheim, Harbinger, Goldman
  • NY’s Lawsky cites ‘short-term focus’ of sponsors
  • Possible repercussions for life insurance annuity business

The two firms, along with Harbinger Group Inc. and Goldman Sachs Group Inc. received subpoenas from the New York Department of Financial Services (DFS) earlier this month requesting material on investment allocations, return assumptions and other documents, according to a person familiar with the matter. It is part of an effort by the agency to develop and carry out new rules for reviewing potential acquisitions of insurance companies.

“Our counsel is communicating with staff for the DFS in order to cooperate with this inquiry and develop a plan for the production of documents,” Guggenheim said in a statement to Buyouts. “There has been no allegation of wrongdoing by any party and this inquiry relates only to the DFS effort to gather information as part of their rulemaking process.” Last December, Guggenheim Partners agreed to buy Sun Life Financial Inc’s annuity unit for $1.4 billion. Spokespeople for Goldman Sachs and Harbinger Group declined to comment.

The agency is seeking to address buyout firms’ “short-term focus” that “may result in an incentive to increase investment risk and leverage in order to boost short-term return,” Benjamin Lawsky, superintendent of the Department of Financial Services, said in a speech last month that laid out the regulatory push.

Lawksy said private equity-controlled insurers account for nearly 30 percent of the indexed annuity market, up from 7 percent a year ago.

All told, U.S. sponsors closed an estimated 60 acquisition in the insurance space between Jan. 1, 2012 and May 30, 2013, according to data from Thomson Reuters. The most active sponsor in the group, ABRY Partners, closed 13 deals starting with the platform acquisition of Confie Seguros Inc. for an undisclosed sum and followed by a number of add-ons. Genstar Capital LLC closed six deals, including several add-ons for Confie Seguros before its sale to Abry. GTCR LLC purchased nine companies, including several add-ons, while BHMS Investments LP closed five and J.C. Flowers & Co. LLC bought three. In the largest deal whose price was disclosed, New Mountain Capital LLC paid $1.3 billion for AmWINS Group Inc., a wholesale insurance specialist with property, casualty and group benefits products.

Annuities are insurance products that people buy to guarantee their income in retirement. They may include a predetermined, periodic payout to a customer upon retirement after regular payments during working years.

While Lawsky didn’t lay out any proposed rule changes for annuity deals, he said rules on banking acquisitions are more stringent.

“The long term nature of the life insurance business raises similar issues, yet under current regulations it is less burdensome for a private equity firm to acquire an insurer than a bank,” he said.

But sponsors that own insurance companies point out that they often structure them for longer holding periods than are typical for their investments.

Apollo Global Management’s Athene, which is buying Aviva plc’s U.S. annuity and life insurance unit for $1.6 billion, is backed primarily by permanent capital from AP Alternative Assets, a publicly-traded vehicle listed on the Amsterdam stock exchange, not a buyout fund. “Apollo’s private equity funds have no investment in Athene,” according to a statement from the firm.

Athene is already regulated by the New York State Department of Financial Services following the agency’s review and approval of Athene’s 2012 acquisition of Presidential Life, a fixed annuity provider based in Nyack, N.Y., Apollo Global Management said in a statement.

Harbinger Group Inc., a publicly-traded holding company similar to Warren Buffett’s Berkshire Hathaway, directly owns Fidelity & Guaranty Life. Harbinger Capital Partners, the New York-based hedge fund and private equity manager, owns a stake in Harbinger Group.

Jim Hatem, an insurance partner at Nixon Peabody LLP, said the move by Lawsky could impact the entire industry as well as other state regulators since the state accounts for a big chunk of private equity and insurance company activity.

“This is a refinement of the analysis that the insurance departments have traditionally undertaken when looking at insurance companies and who owns them and who runs them,” Hatem said. Lawsky “said we’ll make sure that these companies provide customer service even though there will be demands on their capital to streamline their operations.”

Typically, any blow-ups by insurance firms where policy holders don’t get paid are caused not by the shareholders of the companies, but by management decisions within the firm itself, he said.

Noah Theran, a spokesman with the Private Equity Growth Capital Council, a pro-industry group for buyout firms, said the private equity business is comprised of long-term investors that strengthen companies over time.

“One reason why institutional investors such as pension funds, university endowments and charitable foundations favor private equity investment is the long-term nature of the asset class,” Theran said in an email. “Claims to the contrary are simply unfounded.”