KC woman accuses annuities issuer of racketeering
January 19, 2015 by Brianne Pfannenstiel, Kansas City Business Journal
A Kansas City woman has filed a lawsuit accusing an insurance company of dumping billions of dollars in liabilities into hidden accounts to mislead consumers about its financial stability.
Dale Ludwick claims in the lawsuit, which seeks class-action status, that Fidelity & Guarantee Life Insurance Co. sold her an annuity plan that was far riskier than the company let on and therefore less valuable.
Private equity firm Harbinger Group Inc., led by CEO Phillip Falcone, bought F&G in April 2011. The insurance company was known as OM Financial Life Insurance Group at the time.
The move reflected a trend of private equity firms buying insurance companies, which some worried would lead to conflicts between the two investment styles. Private equity firms focus on higher-risk investments for short-term gains, and insurance companies are typically much more conservative and focused on paying out long-term obligations.
Indeed, the lawsuit accuses the company of trying to rapidly expand F&G’s annuities business to free up cash to fund Harbinger’s investment model.
“The conflicting objectives of hedge funds and traditional insurance companies collided in this case when Harbinger — a hedge fund controlled by Phillip A. Falcone — swooped in to exploit the insurance holding company model by acquiring F&G Insurance and using its annuity business as a purportedly cheap source of capital to fund Harbinger’s aggressive investment schemes, and also to extract fees and dividends, thereby jeopardizing F&G Insurance’s ability to satisfy its long-term obligations to its annuity holders, including Plaintiff,” the lawsuit said.
“We believe the allegations are without merit and intend to vigorously defend ourselves in this matter,” said James Hart, a Harbinger spokesman.
According to the court filing, Harbinger extracted about $40 million a year from F&G while investing no capital at all into the newly acquired company.
However, annuity sales can result in immediate strains on surplus and negatively affect key accounting metrics. So to continue the expansion, the lawsuit said, “Harbinger and Falcone had to create the illusion of surplus where none existed.”
That’s why the lawsuit claims Harbinger allegedly began offloading liabilities through a complex reinsurance system. By the end of 2013, F&G had offloaded $3.2 billion in liabilities from its books using faulty accounting practices, the lawsuit alleges.
The liabilities allegedly were housed within affiliated F&G companies in states where they were afforded more lenient oversight.
The lawsuit claims that anyone who bought an annuity from the company, like Ludwick, would have been harmed. The lawsuit claims that F&G’s diminished value harmed her directly in the amount of $6,256.
The lawsuit charges violations of the Racketeer Influenced and Corrupt Organizations Act.
Diane Nygaard of Kenner Nygaard DeMarea Kendall LLC represents the plaintiff.
