Is Guggenheim Pulling The Wool Over Our Eyes?

If you consider yourself an annuity specialist, an annuity wholesaler, an annuity FMO, or an annuity producer, you would have to be living under a rock to have not heard about Guggenheim Partners by now. Seemingly out of nowhere, they have become one of the top players in the fixed and fixed indexed annuity playing field. After gobbling up Security Benefit Life, Standard Life of Indiana, and Equitrust, the next thing they did was start their own insurance company (bearing their name – Guggenheim Life), and have since purchased Industrial Alliance Insurance and Financial Services of Quebec. Furthermore, the latest rumor circulating is that Guggenheim is making bids to acquire Aviva USA (the #2 ranked leader for fixed indexed annuities) and potentially the recently announced Sun Life annuity division. To say Guggenheim has been busy acquiring insurance carriers would be a huge understatement…(foreshadowing)

So why does my title mention that “Guggenheim could be pulling the wool over our eyes”? Let me explain. After reading about all of these acquisitions, I wrote a mostly flattering piece on Guggenheim called, “Guggenheim Partners and The New York Yankees”, where I compared their prowess and their desire to do everything possible to win to that of the ever successful New York Yankees. However, a recent article by Leslie Scism in the Wall Street Journal titled “Insurers Shed Annuity Assets” has me wondering what Guggenheim is really up to. The article discusses the fact that recently many hedge funds, private-equity groups, and other investment managers have started buying up annuity businesses in hopes that they can capitalize on their investment savvy to create more profits where the traditional insurance carriers could not. Furthermore, by moving some of their assets into insurance, it could help diversify their operations and provide a more stable source of earnings.

The main hedge fund and private equity firms mentioned were the obvious:

1. Apollo Global Management, who has non-voting ownership of Athene Annuity (who took over the RBC/Liberty Life book of annuity business in addition to Presidential Life).

2. Harbinger Capital Partners, who took over Old Mutual, also known as Fidelity & Guaranty Life

3. Guggenheim Partners, who has all of the aforementioned annuity acquisitions

Now unless you just hate hedge funds and private equity firms, none of this sounds too threatening yet. But let’s take a closer look at this article and I think you will see what has me perplexed…

In Leslie’s article, she quotes Apollo’s CEO, James Belardi, of saying this about their annuity acquisitions, Apollo’s goal is to be a “market-leading retirement-savings company”. I applaud that statement and he is putting us all at ease that they not only plan on being in the insurance and annuity business long-term, but they have a strategy and goal to become an industry leader. So far, so good.

Now here is where I was forced to re-read the article about 7 times before I decided to write this:

“Guggenheim Chief Executive, Mark Walter, said the financial-services firm got into annuities after being hired in 2009 to manage investments for Security Benefit Life, a Kansas insurer that suffered significant losses in mortgage bonds in the crisis.

That assignment led to Guggenheim forming a group of investors to buy the insurer and shore it up with additional capital, he said.

Guggenheim doesn’t have “a big-picture growth acquisition strategy” for insurance, Mr. Walter said, but looks at available businesses to round out its operations.”

Now, many of you might say that his comments could have been taken out of context, and indeed that might be the case. But after multiple strategic takeovers of insurance carriers, quickly becoming one of the main players in the fixed indexed annuity field with Security Benefit Life, being one of the lead buyers for an approximate $1 billion buyout of the #2 fixed indexed carrier – Aviva (with huge amounts of life insurance as well), how can he say with a straight face that he “doesn’t have a big-picture growth acquisition strategy for insurance”? I am not buying it. And how is that supposed to put any buyer of a Security Benefit, Standard Life of Indiana, or Equitrust annuity policy at ease?

What does give me hope is that at least Guggenheim risked putting their name, brand, and image on Guggenheim Life. Although it truly does appear to be a small part of their insurance acquisitions, I think we can all agree that they are too smart to spend all of the time and energy to create an entire insurance carrier from scratch if they didn’t want it to succeed. Not to mention, if Guggenheim Life ever has issues, the Guggenheim name and brand suffers as well. I call that having skin in the game similar to Allianz Life, Aviva USA, American Equity, and Great American, to name a few.

But what about the other acquisitions such as Security Benefit, Equitrust, and Industrial Alliance? The original concern when hedge funds began buying some of these “distressed insurance assets” after 2008 was that they would simply buy low, bring in a bunch of capital to the carrier to “buff up” the balance sheets, and then sell it for a nice profit. And at the end of the day, who could blame them? They are a hedge fund for crying out loud. Hedge fund and private equity firms’ entire objective is to create value and a return on investment for their investors, not to make friends and playmates in the insurance industry. Buying a distressed asset (whether it be an annuity insurance carrier, a bank, fund, real estate, retail chain, etc) at a low price, turning the asset around, and selling it for a profit is what hedge funds strive to do. And believe me, Guggenheim hasn’t done as well as they have (and kept their good name) by making dumb decisions that don’t make money.

To conclude, before we all get excited about new money coming in to bail out some of the bad books of business in the insurance and annuity arena, we might want to think about what this is going to do long term. If some of these hedge funds are buying our beloved carriers, to which our clients and friends have entrusted their hard earned retirement money, in an effort to simply do a “quick flip” of the carrier to make a buck for their fund, then it might get ugly down the road. Who will buy these annuity assets later on when they do decide to sell?  What if this “new normal” environment makes it tougher than these hedge funds thought it was to make the profit their investors demand, forcing the funds to “cut bait” on their insurance divisions?  What if all of the hedge funds decide to sell these large chunks of annuity divisions at the same time? Will it look similar to neighborhoods where every yard has a For Sale sign? Will this hurt the stellar reputation that many of these long standing insurance carriers have created over decades of weathering both good times and bad?

Perhaps I have taken some of this out of context. Maybe Guggenheim is so large that even after all of these takeovers, this is a small speck on their balance sheet that doesn’t deserve to be considered a “a big-picture growth acquisition strategy”. For the sake of our annuity industry and insurance community, I will continue to hope that all of these hedge funds who are buying up all of our real estate are taking our business seriously with long term objectives…but only time will tell.

 

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2 Responses to “Is Guggenheim Pulling The Wool Over Our Eyes?”

  1. M Edward Smith November 6, 2012 at 1:40 pm #

    I agree, it sure makes you wonder. Especially since their payout on income rider is larger than most carries..scary….

  2. Financial Strategies For Today's Environment November 11, 2012 at 12:30 am #

    Good points, we would be naive not to take a step back and take a closer look at SBL, especially if we are placing client $$ with them.

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