As expected, the NAIC’s Captive and Special Purpose Vehicle (SPV) Use (E) Subgroup adopted its white paper, which it has been toiling with for many months.
The white paper adopted by the subgroup and sent to the parent committee on June 6 during an NAIC open conference call puts to bed the classification by some of captives as a “shadow” industry, and brings to fruition the product of much regulatory concern.
The white paper was adopted by the subgroup a week before the Federal Advisory Committee on Insurance at Treasury’s Federal Insurance Office (FIO) will receive a report on regulatory developments relating to reinsurance captives done under Washington’s top financial regulator, William White. FIO Director Michael McRaith also targeted captive reinsurance transactions as something Treasury should follow in its monitoring of the domestic industry.
In another group meeting, on the same day, a new committee was being born.
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Some state regulators pointed to the work done on captives to try and stay on top of developing issues that could cause real solvency concerns down the road in deciding to go ahead with a new subgroup devoted to examining how investment managers, whether hedge funds or private equity firms, are getting into insurance, specifically in the purchases of large fixed annuity businesses.
The Financial Analysis (E) Working Group (FAWG), which is charged with, among other tasks, promoting multistate efforts in addressing potential solvency problems, including identifying industry trends, has been discussing the increased interest in the insurance industry by private equity (PE) interest and hedge fund managers.
In a conference call June 6, Pennsylvania’s Deputy Insurance Commissioner Steve Johnson, FAWG’s chair, said the group was trying to be proactive as regulators.
During the call, Johnson said that investment firms might never create a problem, but we don’t want to be in that position, if they do, and we aren’t involved. The call was hosted by Rhode Island Insurance Superintendent Joseph Torti III (who chairs the Financial Condition (E) Committee and who spurred much of the work on the captives and SPV oversight issues.
Torti agreed that the industry developments were important issues that needed to be further explored and discussed, and the group unanimously voted to release for comment Johnson’s May 6 memo outlining possible best practices and new procedures to address the market trend, including potentially changing the Credit for Reinsurance Model Law to provide regulators additional authority to require approval of transactions with nonaffiliates and changing state investment laws to provide regulators more authority in limiting risks.
There will also be a new subgroup, as there was for captives, to study the issues. There are a number of transactions underway or pending, including the sale of Des Moines, Iowa-based Aviva USA to Athene Holding Ltd.
Athene Holding is not the only company with ties to a global alternative investment manager (in this case, Apollo Global management) which has been active in the indexed annuity space in recent months. Guggenheim Partners, one of the rumored buyers of Aviva USA, snapped up the U.S. annuity line of Sun Life Financial Inc. for $1.35 billion in December 2012. In August, two Guggenheim affiliates, Security Benefit Life Insurance Co. and Equitrust Life Insurance Co., agreed to purchase the U.S. fixed annuity business of another Canadian-based insurer, Industrial Alliance Insurance and Financial Services Inc., for $800 million.
Some wonder what these investment managers managing risks for five years out, not a lifetime, can do with the annuity portfolio. Overall annuity sales continued their downward arc in the first quarter, according to several recently released statistical reports. But there were some rays of light peeking through the clouds despite the lingering slump.
Industry-wide, annuity sales in the first quarter totaled about $49.6 billion, down 2 percent from $50.6 billion in the final quarter of last year and a 6.6 percent drop from Q1 2012 when sales amounted to $53.1 billion, the Insured Retirement Institute (IRI) reported.