“We’ve dressed up in our best and are prepared to go down like gentlemen.” — Benjamin Guggenheim.1
When Clarice Whitmore bought an annuity from Security Benefit Life Insurance Company in 2012, she had no idea her premium would help fund the purchase of the LA Dodgers baseball team. A resident of Arkansas, she was unlikely to have been a fan. Yet according to a class action suit, the first investment Security Benefit made after Whitmore paid almost $45,000 for her annuity was a $35 million loan to Guggenheim Baseball Management, a newly-formed partnership set up to acquire the Dodgers. Her lawyers reckon that later in the year, Security Benefit extended another $925 million to fund the acquisition.
Of course, policyholders have no more say over how their funds are used than bank depositors. Whitmore’s lawyers may harrumph that the Dodgers investment was “highly speculative and exceptionally illiquid … wholly inappropriate for an insurance company with long-term obligations to its annuity holders.” But as a single position in a diversified portfolio subject to regulatory oversight, that’s not enough to make a case.
Where Whitmore’s lawyers did make their case was in the conflicts of interest that circled the position. At the time it made its investment, Security Benefit was owned by Guggenheim Partners, whose CEO, Mark Walter, set up Guggenheim Baseball Management alongside company president Todd Boehly. The pair tapped Security Benefit and other insurance companies under their control for over half of the $2.15 billion it cost to acquire the Dodgers. Walter took a controlling stake and became chairman of the board, a position he has held since.
The lawyers allege other conflicts, too. Guggenheim controlled four insurance companies in all. Between them, they invested $5.1 billion in debt issued by companies linked to Guggenheim and loaned almost $1 billion to Guggenheim business associates. Against a total reported surplus of $2 billion, this was no small change.
They also reinsured risk with each other, and with a fifth insurer that wasn’t classified as an affiliate but behaved as one. By circumventing “the world of legitimate, arms’-length reinsurance”, the Guggenheim-operated insurance companies inflated their apparent financial strength. Whitmore’s lawyers assert that had she known Security Benefit Life’s true financial condition, she would not have purchased her annuity. “Guggenheim has essentially operated the Guggenheim Insurers like a cash machine,” they conclude.
The suit didn’t survive. The day after it was filed, one of Whitmore’s attorneys filed a notice of voluntary dismissal. A year later, Todd Boehly left Guggenheim to form his own firm, Eldridge Industries, taking Security Benefit with him.2
But the allegations stuck even as the Guggenheim insurance empire grew. Earlier this year, two of its lynchpins, Delaware Life and Clear Spring Life, received grand jury subpoenas in connection with an investigation into whether certain private credit investments should have been treated as related-party transactions. After receiving their subpoenas, the companies went back through their books and found $22 billion in private credit deals that weren’t properly disclosed to regulators as being sent to borrowers ultimately linked to Guggenheim. At Delaware Life, restatements pushed affiliated investments from 3% of invested assets to 42%.
Mark Walter is at pains to rectify the situation. He has presented a plan to the Delaware Department of Insurance to reduce affiliated exposures and has already swapped $6.5 billion of Delaware Life’s related-party investments for an equivalent amount of assets classified as independent. He has agreed to sell the majority stake in the Los Angeles Lakers he bought last year and is in talks to sell his stake in Chelsea FC. “There is no victim here,” he contends.3
But the episode casts a shadow over the private credit industry much as strains at Blue Owl did earlier in the year. Affiliated investments have been growing across the industry as private credit expands its footprint in insurance; Guggenheim, it turns out, is just the sharp edge of a much broader pattern. To see how far it cuts, read on.4
I am honored to be nominated for an Independent Media Award in the finance/business category. Voting is open until Sept 2. You can vote here. Thank you!