Deal watchers in insurance gave a knowing nod to news last week from Sun Life Financial that its December agreement to sell its U.S. annuities business to private equity firm Delaware Life Holdings will be on delay.
Since April, many observers had been expecting that to happen.
April was when Benjamin M. Lawsky announced in a speech that the New York State Department of Financial Services (DFS) was looking into beefing up regulations on private equity (PE) purchases of insurance firms. Lawsky is superintendent of the department.
Not too many regulators are looking into this area, Lawsky said, “but it’s one where DFS is moving to ramp up its activity.”
The risk that has DFS concerned, he said, is whether private equity firms are more short-term focused than long-term. Insurance, he said, is “all about the long haul.”
Not long after, the stargazing began over whether New York’s inquiry would scuttle currently pending mergers and acquisitions involving private equity buys of U.S. insurance firms.
Some of the questions have been about the Sun/Delaware deal, but many others have zeroed in on a more widely publicized transaction—the pending sale of big annuity writer AVIVA USA to Athene Holding Limited. Athene is a Bermuda-based private equity firm funded by investors managed by affiliates of Apollo Global Management.
In its statement last week, Sun Life laid that question to rest, at least concerning its own prospects. The firm said the delay in the approval of its transaction with Delaware Life Holdings was due to New York’s recently launched “review of private investor groups as owners of annuity businesses.”
The company said it is expecting the review “will delay the close of the transaction beyond the end of the second quarter of 2013.”
U.S. regulators need to approve the deal because the Canadian firm has businesses in the U.S. For instance, Sun Life Insurance and Annuity Company of New York is based in New York City. Sun Life Assurance Company of Canada (U.S.), an indirect subsidiary of Sun Life Financial and parent of several other U.S. subsidiaries, is domiciled in Delaware.
Delaware Life Holdings is a New York-based private equity business. It was formed in 2012 by shareholders of Guggenheim Partners. Guggenheim is a Chicago firm that provides investment management and related financial services.
It’s hard to predict where the regulatory process will go on this particular deal, but some indicators do exist.
One is the wording in the Sun Life statement. It doesn’t say the deal is dead or uncertain. It says the deal is delayed. That’s not the sort of wording that corporations use when they are expecting the worst. When blockades are a distinct possibility, corporate statements tend to be more cautious and less detailed than this one.
The Sun Life statement also points out that “a number of regulators, including the Delaware Department of Insurance and the Financial Industry Regulatory Authority (FINRA),” already have approved the transaction.
This raises the possibility that a New York approval will be forthcoming. After all, if FINRA and Delaware already have approved the transaction, a New York rejection doesn’t seem to be in the cards.
Finally, what Lawsky said in his April speech provides a glimmer of what the regulators really have in mind. That is, the department is looking at strengthening regulations involving such deals. Lawsky did not say the department has begun disapproving those deals.
Of course, disapprovals could come, in the sense that anything is always possible.
But given that other regulators are involved, that might be iffy. There would, perhaps, first be a substantial amount of regulatory discussion between all involved regulators. Alternatives might emerge. Lawyers might weigh in.
A negotiated solution would be the more likely outcome.
Some in the insurance industry have been wondering what New York’s possible regulations might look like. And what the potential impact might be on future private equity/insurance deals.
As of now, the department has not issued any drafts. However, there is a clue in Lawsky’s April speech, as posted on the department’s website.
When it comes to private equity investments, the differences between the banking and insurance industry are “quite striking,” the Lawsky document says.
“Private equity firms rarely acquire control of banks, not because they are prohibited from doing so, but because the regulatory requirements associated with such acquisitions are more stringent than a private equity firm may like.
“These regulatory requirements in the banking industry are designed—in part—to encourage a long-term outlook, and ensure that the person controlling the company has real skin in the game.”
This suggests that the New York regulators may be looking to the banking industry regulations for some ideas regarding new regulations for private equity ownership of insurance companies. The banking regulations have requirements for percentage of ownership, disclosures and many other things, and they have been updated in the years following the 2008-2009 recession.
If the regulations do come out, and if deal-makers view them as onerous, that could deter future interest in such transactions.
A more immediate question is, what happens if the New York inquiry drags on longer than pending deal-makers want or had intended? Buyers and sellers will no doubt look to their signed agreements for provisions regarding potential exits or other options.
Should the deal-makers back off or the regulators block the deals, would-be sellers might consider doing an initial public offering (IPO) for the business to be sold.
IPOs don’t happen every day in insurance, but they do occur. For instance, in May, Dutch-based ING Groep NV did an IPO of ING U.S. Inc. (VOYA), its New York-based unit. In 2004, various insurance businesses of General Electric did an IPO for what became Genworth Financial. In the late 1990s, The Hartford Financial Services Group issued an IPO for its Hartford Life business (but later bought it back).
Up to now, there has been no public talk of IPOs for the pending deals, so this might be a distant, if not non-existent, possibility.
It also could happen that the deal-makers elect to sit tight and see what the New York regulators do before making next-step decisions.
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