When annuity marketing material needs a little embellishment, that can be a big problem in court.
By Linda Koco
Even though 2013 is ending, the buzz around private equity ownership of annuity companies is nowhere near over. In fact, the fireworks around private equity companies buying and operating annuity carriers, so prominent in 2013, might continue well into 2014.
One indicator is that, in December, the National Association of Insurance Commissioners (NAIC) charged its newly-formed Private Equity Issues (E) Working Group to delve into whether new regulation or regulatory guidance is needed surrounding such ownership.
Meanwhile, at least one private equity owner of a big annuity company is pushing for a level playing field — that is, it is calling for regulations that apply to all life carriers, not just those owned by private equity firms.
Based on those two developments alone, the push and pull could get dicey.
The regulators tasked the private equity working group to look into developing procedures that state regulators can use when considering ways to “mitigate or monitor” risks associated with private equity/hedge fund ownership or control of insurance company assets.
This includes developing “best practices” as well as considering possible changes in NAIC policy positions, the NAIC charge said.
The risks in question are those stemming from potential conflict between the insurers’ need to invest to meet the long-term promises inherent in life/annuity products and the short-term business model that many private equity firms espouse.
But just a few days before the NAIC decided on the new working group’s charge, some executives of private equity-owned Athene Holding provided some surprising comments to a meeting of that group.
One surprise is that, instead of railing against the idea of creating regulations that would increase monitoring of carrier ownership issues, Athene’s executives voiced support for increased use of certain “best practices” for such monitoring.
The cooperative approach is an eye-opener, in view of the guarded response that some states gave to Athene — and to a few other private equity firms — as the firms began sniffing around for acquisitions of U.S. annuity companies two years ago. (Athene, an insurance unit of Apollo Global Management, did end up buying Aviva USA. The acquisition made the combined company — Athene USA — one of the biggest fixed annuity carriers in the U.S. The deal closed in October — but not before the meting out of regulatory delays and conditions.)
The next surprise is that, although the executives supported some expanded areas of regulation, this support comes with a proviso — namely, that best practices or other regulatory work be structured to apply to all life insurers, not just private equity owned carriers.
Belardi on the level playing field
Athene chief executive officer James R. Belardi put that message front and center in a Dec. 16 letter he emailed to the NAIC working group. He said his company believes that the equitable treatment of companies is an issue that should be of equal concern with protection of policyholders.
“Basic principles of competition, fairness and equity support the principle that all life insurers should compete in the marketplace and be regulated on the basis of a level playing field,” he said.
His letter lays out his company’s thoughts on the best practice suggestions that another NAIC working group had developed for the new private equity working group’s consideration.
Many of the best practices have the potential to be effective tools for state regulators to use to monitor and mitigate risks, he allowed. “But they should be applied across the board and not just to companies identified as being associated with private equity firms,” he wrote.
“In fact, applying the rules in an arbitrary or discriminatory manner may have the ultimate effect of repelling new capital, rather than attracting it, at the very time that the industry is most in need of capital.”
He suggested some examples of best practices that could assist state insurance regulators in monitoring all insurers. Two are coordination with international or certain other functional regulators, and review of carrier investment portfolios.
But these should apply “regardless of ownership structure [sic],” he wrote, and not merely to “those that are associated with private equity investment or the subject of an application for approval of an acquisition of control.”
Not 100 percent
Belardi didn’t endorse all the practices on the working group’s suggestion list, however. Some are already covered by existing regulatory authority, so in those areas, “no changes to laws or regulations are needed,” he said. Others are “not feasible” or “set an unfair standard” or are “not germane to regulatory process.”
When discussing transactions between private equity firms and life insurers — a tender issue for annuity producers and carriers as well as private equity firms — Belardi returned once again to the main message: “We believe that it is inappropriate to apply a higher standard to acquisitions involving private equity firms and that any such standard will create a significant barrier to life insurers’ ability to raise capital.”
The way it looks now, in 2014, state insurance regulators will be studying whether and how to improve regulation of insurers that are owned by private equity firms. On the other hand, private equity firms that want to grow in the annuity market will be showing up at regulatory — and possibly other — industry meetings, making their views known.
Neither side seems to be going away, both seem to be increasing their engagement, but where they headed is not yet apparent.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at firstname.lastname@example.org.
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