Lawrence Rybka, CEO of ValMark Securities, a wealth-advisory firm, says his firm won’t sell the new insurers’ annuities, in part because the providers’ financial-strength ratings from A.M. Best, a credit-rating company that focuses on the insurance industry, aren’t high enough. His Akron-based company’s liability insurance won’t pay for his defense if he’s sued by a client who buys an annuity from a company with less than an A rating that later fails, he says.
With a typical annuity, a customer hands over her retirement nest egg to an insurance company in exchange for a promised future stream of payments. The insurer invests the money and gets to keep any earnings beyond what’s guaranteed to the policyholder. If the bets backfire and the insurance company fails, some losses may be borne by customers and state guarantee funds, Rybka said. “The long-term interests of policyholders are not in alignment with the short-term interests of private equity,” Rybka says. “It’s a heads-I-win, tails-you-lose game.”
Until April 2011, Patrick “Pete” Dodd, a former money manager at Liberty Life Insurance in Greenville, S.C., invested customer premiums in what he calls a “squeaky clean” portfolio: bonds backed by state governments and blue chip corporations. Then Athene Holding, a company funded by private equity firm Apollo Global Management (APO), acquired Liberty and changed its investment strategy. Now the unit’s holdings include securities backed by subprime mortgages, time-share vacation homes, and a railroad in Kazakhstan. “When you look at the business model these guys use, where they’re substantially increasing the risk in the bond portfolio, sooner or later, in my opinion, that has to come home to roost,” says Dodd, who helped manage $4 billion before the sale to Athene.
Wall Street firms such as Apollo, Goldman Sachs Group (GS), Harbinger Group (HRG), and Guggenheim Partners are acquiring life insurance companies that specialize in retirement savings products known as fixed annuities. They’re shaking up a staid industry with investments in everything from the Los Angeles Dodgers baseball team to the kind of mortgage-backed securities that cratered during the financial crisis.
The newcomers are meeting resistance from some state insurance regulators, accustomed to plain-vanilla portfolios, who have warned about exposing policyholders to greater risk. “Their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders,” Benjamin Lawsky, New York State superintendent of financial services, said in a speech on April 18.
The money managers say their investments are no more dangerous than those of traditional insurers and that they’re managing them with a long-term view. While some of Athene’s investments are unorthodox, “our portfolio is less risky than traditional life-insurance companies,” says Bermuda-based Chief Executive Officer James Belardi.
Source: Bloomberg BusinessWeek, April 29, 2013
Best of Boomer Blogs #306
Come and observe interesting segments of trend-setting happenings that seek life's meaning through passionate living. Be sure to visit SoBabyBoomer's tent at the Best of Boomer Blogs #306 hosted this week by Katie Gustafson Foster at Arabian Tales and Other Amazing Adventures. Katie Foster is a freelance writer and photographer based in Dubai, United Arab Emirates whose main interests include travel, culture, fashion, food and wine.
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