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Guggenheim gets approval on Sun Life deal

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Under pressure from the New York Department of Financial Services (DFS), Guggenheim Partners agreed to an enhanced set of solvency safeguards in its affiliate’s acquisition of Sun Life Insurance and Annuity Co. of New York. In return, New York will approve the purchase of Sun Life by Delaware Life Holdings, the Guggenheim affiliate. 

This is the first time that such insurance regulatory requirements have been exacted from private equit (PE) or alternative investment firms. 

The New York Department of Financial Services, which announced the deal today, and other state regulators and insurers have highlighted with concern a spike in investment firms moving into the annuity business. In April, the DFS subpoenaed a number of these firms that are buying up fixed and indexed annuity insurers, delaying some of the deals.

Specifically, Guggenheim Partners agreed to heightened capital standards of risk-based capital levels of at least 450 percent; establishment of a separate “backstop” trust account of $200 million; enhanced scrutiny of investments, operations, dividends and reinsurance; and extensive disclosure and transparency requirements. RBC levels in New York have been reported to be greater than 200 percent but the DFS did not entertain inquiries on the subject.

ben lawskySuperintendent Ben Lawsky emphasized that these measures, which he terms a model set of guardrails, would and should be required going forward. “Other non-traditional insurance industry investors asking us to approve similar transactions are going to have to step up and clear a high bar for protecting policyholders,” Lawsky stated.

The annuity company buyout trend has raised concerns because PE firms typically have a more short-term oriented business model than traditional insurers.

Some of these management firms have argued that they are in it for the long-term with respect to their annuity companies, but some, like Guggenheim, have raised flags because they are buying hobby properties at high prices, such as the purchase of the Los Angeles Dodgers for $2.15 million, which was made by certain Guggenheim investors and outside investors, as news reports have claimed

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Some general transactions that have occurred are pure private equity plays, but like with the Athene deal and Apollo backing for the pending Aviva transaction, they are run more like a traditional insurance company with long-term capital funding, said Matt Hutton, a partner with Deloitte’s M&A transaction group in New York in an interview earlier this summer.

Athene, for its part, stated in response to a query, “We are working with regulators in New York and Iowa and are committed to addressing their issues.”

Private equity traditionally is going to have a five, seven, 10-year hold period and “you don’t want to tie up that capital forever,” Hutton said.

“Everybody is getting concerned that they will effectively strip out all the capital in the business and take that and leave the policyholders left holding the bag,” Hutton said. 

However, he and others note that insurance companies have worked the same way, with AIG and its financial products division or Warren Buffett in buying different insurance companies using the float, putting the money to work in other asset classes. 

“…You have your risk-based capital rules that the state insurance regulators are going to require, you have the rating agencies that are going to come in and look at the underlying financial health of the insurance company,” Hutton said.