Life Insurers Flock to ‘Easy’ Iowa As More Federal Oversight Looms
April 1, 2014 by Zachary Tracer
After Symetra Financial Corp. was formed in 2004, the life insurer set up shop in a 25-story glass tower outside Seattle, put its name on the building and pushed the state to adopt more favorable rules for its business.
The company advocated for a law to reduce its cost of investing in derivatives, saying that without the change it might have to move somewhere more welcoming. The bill languished in the Washington state legislature last year, and in January Symetra made good on its promise. It said it would switch the legal domicile of its main life insurer to Iowa.
“We’re looking for a level playing field to more effectively compete with other life insurance companies,” Diana McSweeney, a Symetra spokeswoman, said in an e-mail.
Symetra is joining insurers including Baltimore’s Fidelity & Guaranty Life that are relocating to Iowa or expanding there, lured by what they consider a better regulatory climate. The ability of insurers to choose the most favorable of 50 state watchdogs has caught the attention of U.S officials, who say the oversight system needs more consistency.
“I’m not completely thrilled when I see companies moving domiciles,” said Jeffrey Stempel, a law professor at the University of Nevada, Las Vegas, who specializes in the insurance industry. “It’s usually because they think the regulator will let them get away with more.”
State insurance regulators meeting this weekend in Orlando, Florida, are under pressure to reach consensus on rules to head off potential efforts by Congress or U.S. agencies to erode their authority.
Third Largest
About 8.4 percent of Iowa’s economic activity comes from its insurance industry, the third-largest in the U.S. by that measure, according to the state’s economic development agency. Since the late 1980s, 25 life insurers have switched domiciles to Iowa and 14 have left, Tom Alger, a spokesman for the state’s regulator, said in an e-mail. The state is now home to 29 life carriers.
The Des Moines insurance industry employs about 24,100 people, according to the Bureau of Labor Statistics. Another recent arrival is Athene Holding Ltd., controlled by Apollo Global Management LLC and run by former American International Group Inc. executive James Belardi. The Bermuda-based insurer purchased Aviva Plc’s U.S. life and annuity business last year and is moving products and operations from Delaware and South Carolina to Aviva’s West Des Moines facility.
In an e-mail, Belardi praised the “strong talent pool” in Des Moines and Iowa’s “very fair regulatory environment.”
Nick Gerhart, the Iowa insurance commissioner, said his state takes a “balanced and measured” approach to regulation.
Consumers First
“We take our steps to protect consumers first, but we’re also open to discussions with industry,” Gerhart said in a phone interview. Letting insurers choose regulators isn’t problematic, Gerhart said, because every state meets standards set by the National Association of Insurance Commissioners.
Symetra Chief Executive Officer Tom Marra and Fidelity & Guaranty CEO Lee Launer have lauded Iowa’s approach to indexed insurance products, which some consumer groups have criticized as potentially risky retirement vehicles. The contracts, which include life insurance and annuities, tie increases in a client’s account balance to changes in a benchmark such as the Standard & Poor’s 500 Index.
Insurers also have said that Iowa places fewer restrictions than other states on firms that seek to transfer liabilities to affiliates known as captives.
Derivatives Bill
For Symetra, derivatives were another reason to move. The firm, formerly the life insurance unit of Safeco Corp., wanted Washington state to change its laws so that in the event of an insolvency, counterparties in derivative transactions would be in front of other creditors. That would have enabled firms like Symetra to invest in the instruments at lower cost, in line with rules adopted by more than 20 states, according to an estimate from the American Council of Life Insurers, an industry group.
The company said in its 2012 annual filing that the absence of such a law could force it to switch domiciles.
Symetra “had to put up a lot of collateral whenever they did a derivative hedging trade, and so that collateral made it a real pain in the butt,” said State Senator Mark Mullet, a Democrat, who co-sponsored the bill backed by the firm. “It really reduced the amount of people who would accept them as a counterparty.”
The reasoning failed to move state lawmakers. “A lot of the elected officials heard the word ‘derivatives’ and just panicked,” Mullet said.
‘Leading Way’
Iowa already treats counterparties as first in line. So Symetra decided to move its domicile to the state. It plans to keep 900 employees in its Bellevue, Washington, headquarters and hire about 40 in Des Moines, about 3 percent of its workforce of 1,230, the company has said.
Iowa is “leading the way” on many important rules, Symetra’s McSweeney said by e-mail.
Fidelity & Guaranty, which is controlled by Philip Falcone’s Harbinger Group Inc., made the switch to Des Moines in November, after Maryland regulators rejected as too risky the company’s proposal to transfer some liabilities to an affiliate. The company said at the time that the ruling wasn’t the reason for the switch.
In its most recent quarterly filing, Fidelity & Guaranty said one of its affiliates, reinsurer Raven Re, benefits from Iowa’s rules on such transfers. Without Iowa’s dispensation, the unit’s capital levels would fall below regulatory requirements, according to the filing.
‘Shadow Insurance’
The use of captives has drawn scrutiny from regulators including the New York Department of Financial Services, which dubbed the practice “shadow insurance.” Captives have contributed to increasing risk in the life insurance industry since their use accelerated after 2000, according to a paper by Ralph Koijen and Motohiro Yogo published this month by the Federal Reserve Bank of Minneapolis.
Rules tied to those vehicles are among the main areas where state regulations lack uniformity, according to a report by the Federal Insurance Office, which was created as part of the Dodd- Frank Act, the 2010 law designed to avoid bailouts of financial firms. The inconsistency across states can undermine the main measure of solvency used by regulators and put some insurers at a disadvantage, the report said.
“What they want is an easy playing field,” Joseph Belth, professor emeritus of insurance at Indiana University, said in an interview. “You go where the companies are having the least resistance from the regulator.”
Indexed Annuities
Iowa also has a more accommodating attitude toward annuities, according to Brendan Bridgeland, director of the Center for Insurance Research, a Cambridge, Massachusetts-based nonprofit. Some of the largest sellers of indexed annuities have insurance units in Iowa, including Athene, No. 3 provider American Equity Investment Life Holding Co. and ING U.S. Inc.
Insurers “want to deal with a regulator who is up to date and interested in working with companies when it comes to approving and reviewing new products,” Bridgeland said. “That’s certainly where Iowa stands out.”
One of Iowa’s U.S senators, Tom Harkin, helped the state retain its position as a center for indexed annuities. When the Securities and Exchange Commission discussed taking over regulation of the products a few years ago, Harkin sponsored a Dodd-Frank amendment to leave oversight with the states.
In a 2010 letter, the Consumer Federation of America said Harkin’s proposal “would open a gaping hole in investor protections,” and “would encourage a race to the bottom among states.” The Harkin measure became part of the law.
‘Sophisticated’ Approach
Fidelity & Guaranty, which got 95 percent of its 2013 sales from fixed indexed annuities, moved to Iowa because the state has a “sophisticated regulatory approach to indexed products, and strong business climate,” CEO Launer said in a statement.
Symetra has said it is seeking to expand that product line. Switching to Iowa “obviously gives us an opportunity to create a captive, but it’s also a good environment for indexed annuities,” Symetra’s CEO Marra said on a conference call with analysts in January.
Gerhart, who worked at American Equity and Sammons Financial Group before being appointed to his current role in 2012, said Iowa has developed expertise in indexed annuity and life insurance products. The state has staff dedicated to reviewing them and has taken the lead, after consumer complaints, in developing standards for product sales, he said.
More recently, the regulator has been involved in rules for how indexed life insurance is sold, Gerhart said.
“They’re good products, my family owns them and they work well for us,” he said. “A consumer needs to understand what it is they’ve bought. They don’t need to understand every single point and feature of it, but they need to have a general understanding of how it works.”
Federal Oversight
In its study of insurance oversight, the Federal Insurance Office, or FIO, recommended eliminating big disparities in state rules. The group didn’t call for a U.S. takeover of insurance regulation. The government could set national standards while leaving enforcement to the states, or take a more direct role in some parts of the industry, the report said.
The extent of federal involvement should be determined by Congress, based on how much progress states make in improving oversight, according to the report.
Howard Mills, who was New York’s insurance watchdog and now works as chief adviser in Deloitte LLP’s insurance industry group, said the FIO report provides the states with added motivation to work together on topics such as captives and reserves that will be discussed at their Florida meeting this weekend.
“There’s an expectation that there’ll be kind of a challenge to the state regulatory system, from the FIO and the Feds in general, to do a better job at coordinating their activity,” Mills said. “That comes at a time that they’ve got some real dissension within the ranks” of state regulators.
