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Lawsky takes aim at PE involvement in insurance

For those who still shudder at the name of Eliot Spitzer and the disruption caused by his campaign against the P&C industry in 2004-05, the recent muscle flexing by New York's new sheriff Ben Lawsky is likely to bring back uncomfortable memories.

Lawsky - one of the world's most powerful regulators through his position as superintendent of the newly created Department of Financial Services - appears to be following in Spitzer's footsteps in his focus on the insurance industry. Only this time it's mainly life insurers in his targets - at least for now.

Earlier this month, he criticised life insurers for using offshore reinsurers with lower capital requirements. Despite this being a sine qua non feature of the international (re)insurance markets, he described the practice as "financial alchemy" and "shadow insurance".

"Shadow insurance makes a company's capital buffers - which serve as shock absorbers against unexpected losses or financial shocks - appear larger and rosier than they actually are," his department exclaimed.

And now the regulator - dubbed by some as the Sheriff of Wall Street - is investigating private equity (PE) investments in the industry.

His interest is not entirely new. In a speech earlier this year, he said: "Generally private equity firms follow a model of aggressive risk-taking and high leverage, typically making high-risk investments."

But late last week Canadian firm Sun Life Financial warned that Lawsky's probing would disrupt the agreed $1.35bn sale of its US annuities business to PE firm Guggenheim Partners.

Sun Life - which had said the sale would be completed by the end of this month - added that it would still try and close the transaction "as soon as possible".

The danger for this deal - and for others that are in the pipeline (such as the sale of Aviva's US arm to PE firm Apollo) - is that Lawsky will dictate that insurers in these circumstances will require more capital.

Although Lawsky is not a national regulator, the significance of New York does give him a wide jurisdiction given the need for most multi-national financial firms to have a presence there.

But perhaps most troubling is that the broad thrust of his arguments could equally be applied to the P&C pastures. For example, his recent censure of "shadow insurance" also attacked the widespread use of letters of credit by (re)insurers outside of New York as "hollow assets".

Even more trenchant was his criticism of so-called "naked parental guarantees", where a parent company "simply promises" that it would cover any losses.

Lawsky said that the weaker collateral requirements in other states and offshore jurisdictions put policyholders "at greater risk".

Indeed, the superintendent has already attacked carriers for their handling of claims arising from Superstorm Sandy, as well as the conduct of force-placed writers.

Where will his aim settle next?

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