What do Regulators, Private Equity and Insurance Companies have in Common?

There is a recent trend in the insurance carrier space, specifically revolving around annuities, where Private Equity Firms and Hedge Funds are buying out insurance companies.  Let’s first take a look at completed transactions in the industry by figuring out who owns whom.  Currently, Apollo Global, Guggenheim and Harbinger have a pretty big foot-hold in the indexed annuity space.  Apollo owns Athene, Harbinger owns Fidelity and Guaranty (F&G) and Guggenheim owns quite a few carriers including Security Benefit and Equitrust.  Private Equity’s share of the annuity business rose to 30 percent from 7 percent in the last year alone.


So why are Hedge Funds and Private Equity groups interested in annuities all of a sudden?


The reason these groups have taken such a great interest in annuities is that they are able to get capital at a very inexpensive cost and keep the capital for a long time.  This allows these groups to use that capital to make a higher return on investment.  Obviously, there are rules as to how this money can be invested and how much capital needs to be in reserves.   The question is are these groups bending those rules?

Let’s be honest with each other, private equity firms are usually focused on maximizing short-term gains are not always in the game for the long haul.  This is particularly dangerous in the retirement space as the long haul is what the annuity customers are looking for.

Benjamin Lawsky, the superintendent of the New York Department of Financial Services has said “For example, a private equity firm can invest in 10 deals and have three fail, but that is still seen as a successful year. If one of (those three deals) is an insurance company that’s a lot of people’s retirement … and that’s a big problem.”

In May, Mr. Lawsky issued subpoenas to a handful of firms including Apollo and Guggenheim.  This subpoenas has put a hold on one deal and could delay others.  Guggenheim was in the process of buying Sun Life’s variable annuity division. It was originally scheduled for close by the end of June.

Currently, the insurance carriers that are owned by private equity groups are offering more yield in the forms of caps, rates and riders than the insurance companies that are independently own.  So is this a good thing or a bad thing? That’s what the regulators want to know.  How come all of a sudden the private equity groups can do significantly better than the traditional carriers?

The fear is we fast-forward 10 years from now and these carriers can not afford their obligations and are then forced to reduce future payouts to their customers.  This would be detrimental to people’s retirement.

New regulations would require greater disclosure from private equity firms.  This would be similar to private equity groups that invest in banks.

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