Sun Life Financial Inc. announced on June 21, 2013 that it expects the review by the New York Department of Financial Services (DFS) of investments by private equity firms in reinsurers of annuities to delay past June 30, 2013 Sun Life’s sale of its U.S. annuity business to Delaware Life Holdings, LLC, a company owned by shareholders of Guggenheim Partners.  Click here for a link to Sun Life’s press release.

In remarks at the Hyman P. Minsky Conference on the State of the U.S. and World Economies in New York City on April 18, 2013, DFS Superintendent Benjamin M. Lawsky expressed concern about investments by private equity firms in the annuity business noting the “aggressive risk-taking and high leverage” and “short-term focus” of some private equity firms.  He added that private equity investors may not be a “natural fit for the insurance business.”  Click here for a link to Superintendent Lawsky’s remarks.

In the last few years, there have been a number of significant reinsurance transactions in the annuity industry which have permitted insurers to transfer risk related to annuity business with guaranteed returns, accretions or account values.  Traditional reinsurance markets have shown little appetite for these risks.  In addition, rating agencies and industry observers have periodically analyzed the adequacy of the annuity reserves of the industry as a whole and of particular insurers.  Thus, the willingness of private equity investors to back reinsurers which assume guaranteed annuity business opens up a source of surplus relief to the annuity industry that potentially provides reinsurance capacity and strengthens the industry’s balance sheet.

Increased regulatory scrutiny of private equity investments in annuity businesses and public statements by insurance regulators about the desirability of such investments in the annuity industry may reduce interest in such investments and have long-term impacts on the financial condition of annuity companies.

We will continue to monitor the situation and report on developments relating to the DFS’s review of private equity investments.