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Regulators Scrutinize Firms' Ties to Insurers

New York's top financial regulator subpoenaed a handful of Wall Street investment firms about their entries into a corner of the insurance industry that guarantees steady payments to hundreds of thousands of retirees and other consumers.

The New York Department of Financial Services on Sunday sent subpoenas to Apollo Global Management LLC, Guggenheim Partners and Harbinger Group Inc. as part of an investigation seeking more information on investments that back so-called fixed annuities, according to people familiar with the inquiry.

Regulators are particularly focused on a deal for Athene to buy U.S. businesses of British insurer Aviva.

The agency is concerned that with more investment firms acquiring or otherwise becoming involved with insurance companies, insurers are making potentially risky bets with some of the money needed to fulfill contracts that many customers depend on to supplement their Social Security checks and other retirement savings.

Additional subpoenas were sent to insurer Global Atlantic Financial Group and its former parent, Goldman Sachs Group Inc., for information related to their role in a deal that will significantly expand an insurer with ties to Apollo, the people said. Another firm, Tiptree Financial Partners LP, also received a subpoena over its acquisition of an insurer, one of the people said.

An Apollo spokesman said the firm "looks forward" to providing information to the New York regulator, adding that none of its private-equity funds are invested in the insurer being scrutinized, which has ample capital. A Guggenheim spokesman said the firm welcomes the inquiry, adding it will underscore the benefits of its significant and long-term investments in insurance companies over decades. Harbinger, Goldman and Global Atlantic declined to comment, and Tiptree couldn't be reached.

The agency is seeking emails, memos, investor pitch-books and financial forecasts related to the investment firms' insurance businesses, as well as more information on how the businesses are funded and their investment strategies, the people said.

The investigation is in its early stages, they said. A subpoena is a legal demand for information and doesn't signal wrongdoing by the recipients. The agency isn't currently concerned about illegal activity, but wants to learn more about the insurance companies' plans as it considers potential new regulations, the people said.

The subpoenas come about a month after the Department of Financial Service's superintendent, Benjamin M. Lawsky, vowed to scrutinize what he called the "troubling role" investment firms are playing in acquiring insurance companies or managing money on their behalf.

In an April speech, Mr. Lawsky raised concerns that these insurance companies could be making high-risk investments instead of the basic, steady bets on high-quality bonds traditional insurers usually place with policyholders' money.

Insurers with ties to private-equity firms and other investment firms now account for about 15% of the total fixed-annuity market, up from 4% in 2012, Mr. Lawsky said in the speech.

People close to the investment firms say that most investments their related insurers make continue to be in assets with high credit ratings, with only a small slice devoted to riskier bets. In getting involved in annuities, the financial firms must maintain certain capital reserves and follow other regulations that apply to traditional insurers.

The most-basic types of fixed annuities promise payments at specified interest rates to retirees and other customers over the life of a contract.
Many traditional insurers have been selling their fixed-annuity businesses as they struggle to earn money amid rock-bottom interest rates. Insurers try to earn more on their investments than they promise to customers, a difficult proposition when some older contracts on their books guarantee returns similar to those that come with high-quality corporate bonds.
In many instances, the investment firms are acquiring the businesses at cut-rate prices, and believe their investment savvy with holdings like mortgage bonds, private-equity funds and offbeat investments such as stakes in a professional baseball team will help them make substantial profits, according to analysts and some executives at the companies. Mr. Lawsky's agency recently approved the acquisition of a New York insurer by a company with ties to Apollo.

Critics have emerged, including regulators and some executives at traditional insurers facing competition from these industry newcomers. They say the nontraditional owners' higher risk tolerance could end badly if the economy worsens. Mr. Lawsky and his staff are concerned some insurers now are increasingly investing in pools of loans that get packaged and sold to investors such as collateralized debt obligations and mortgage-backed securities, which suffered during the financial crisis, say people familiar with their thinking.

Athene Holding Ltd., a Bermuda-based company funded by an Apollo affiliate and formed in 2008, has acquired insurance companies with a collective $16.2 billion in assets. Guggenheim, a fast-growing money manager that oversees more than $170 billion in assets, in 2010 formed a group of investors to buy and shore up Security Benefit Life, a Kansas insurer that suffered significant losses in mortgage bonds during the financial crisis. Harbinger in 2011 acquired a U.S. life and annuity business from British insurer Old Mutual.

Mr. Lawsky's agency is particularly focused on a deal for Athene to acquire the U.S. annuity and life businesses of British insurer Aviva PLC, the people said. The deal, expected to close later this year, would add between $35 billion and $45 billion to Athene's balance sheet, making it the U.S.'s second-largest seller of fixed indexed annuities, which are tied to certain market indices.

Athene plans to sell Aviva's U.S. life-insurance business to a subsidiary of Global Atlantic as part of the deal, the companies have said. Mr. Lawsky's agency is seeking more information on the transaction, the people said.
More than 90% of Athene's assets are with investments deemed by insurance watchdogs to have good credit ratings or a medium amount of risk, said Apollo President Marc Spilker during a May investor call.
Only about 6% of the company's assets are with so-called "alternatives" in various Apollo funds, he said. About half that 6% is invested in private-equity-style funds that own small petroleum companies in Texas and certain real-estate assets, among other things, said a person familiar with the matter.

Athene is well capitalized, maintains money reserves that regulators require and employs a management team "focused on creating safe, consistent long-term returns," Mr. Spilker said on the investor call.
Guggenheim's shareholders have operated insurance companies for decades and they have performed well and withstood the financial crisis, a spokesman said. Guggenheim's shareholders are "good owners of insurance companies" and "not short-term focused," the spokesman said.
Guggenheim's chief executive led a group last year that acquired the Los Angeles Dodgers baseball team for $2.15 billion, including about $100 million from several insurance companies, according to a person familiar with the deal.