Gene MaddausThe L.A. Dodgers are heading to the playoffs as the richest team in the major leagues. With a payroll of $300 million, a TV contract worth $8.35 billion and two of the two best pitchers in the world, they are in a strong position to contend for their first World Series in a generation.
They are here thanks to Mark Walter, who bought the team out of bankruptcy three years ago for a record-setting $2.15 billion. Since then, he's kept right on spending. A hundred million for stadium improvements? Sure. An $85 million contract for Andre Ethier? Uh, OK. How about $18 million a year to Matt Kemp to play for another team? Why not?
It's a stark contrast with the previous owner, Frank McCourt, who lived the high life while keeping the Dodgers on a tight budget. Walter has spent and spent and spent some more, and if he can buy a World Series, he'll be canonized — up there with the O'Malleys in the city's esteem.
Still, Walter remains a blank. Unlike Steve Ballmer, the histrionic former Microsoft CEO, who also recently paid billions for an L.A. sports franchise, Walter has kept the details of his business career out of the public eye.
Since 2000, the 54-year-old has been CEO of Guggenheim Partners, a sprawling enterprise that specializes in asset management, largely for insurance companies. Unusual for a company of its size, it is privately held, which means little is known about it beyond what Walter and his associates choose to say — and that's not much.
In a rare interview with Bloomberg TV, Todd Boehly, the No. 2 man at the firm, described the company as a “federation of businesses” and talked up everything it owned, from the Dodgers and the Golden Globes (“premium content”) to construction companies in Spain and oil shale drillers. The company recently spun off a firm that is building mixed-use properties in London and has been rumored to have an interest in buying an English soccer team.
However, some intriguing and, to some, troubling aspects of Guggenheim's holdings have emerged in insurance filings and in a class action lawsuit, which was filed and then mysteriously dropped last year. Though they offer a fragmentary look at the Guggenheim empire, they do offer fresh details about Walter's purchase of the team.
Beginning in 2009, Guggenheim bought three small and struggling insurance companies — and, in less than three years, restored them to such health that they could be tapped to invest in the costliest ever deal for a sports team.
In the insurance world, known for its understated stability, Guggenheim's flashy moves have raised some alarms. “Insurance companies are designed to be one of the safest places to put your money,” says Bob Phillips, president of Alternative Brokerage. “Now you've got a whole different animal — an insurance company owned by investment groups and hedge funds. The perception is they're willing to take more risk for a better return. That's always great while it works. If it doesn't work, God help everybody.”
The Dodgers bankruptcy auction came at the end of a two-year ordeal, as Frank McCourt fought his ex-wife, Jamie, in a scorched-earth legal battle for control of the team. After taking the Dodgers into bankruptcy, and suffering through a fan boycott, he finally agreed to sell.
The auction was set for March 28, 2012. By that point, the contenders had been narrowed to three. Stan Kroenke and Steve Cohen were the heavyweights, with net worths of $3 billion and $8 billion, respectively, according to Forbes. Then there was Walter. He was so unknown that he wasn't even on the Forbes billionaires list. Wealth-X, the “global authority on wealth intelligence,” pegged his net worth at $1.3 billion.
Yet the night before the auction, Walter won the team outright with a preemptive offer for $2.15 billion — in cash. Who was this guy? Where did he come from?
The L.A. Times set out to answer that question. Reporters called around to his business associates and produced a biographical sketch. He had grown up in Iowa and now made his home in Chicago, where he worked in finance. But nobody there seemed to know him very well. The few who had dealt with him seemed to like him. The Times' profile concluded that he was a “low-key, decent guy.”
“I'm nothing special,” Walter told author Molly Knight for her book The Best Team Money Can Buy: The Los Angeles Dodgers' Wild Struggle to Build a Baseball Powerhouse, “just the king of common sense.”
Guggenheim Partners had quietly become a major investment adviser, managing a pool of $125 billion. But that was other people's money. How could Walter personally afford a $2 billion franchise — three times what anyone had ever paid for a baseball team?
Walter had partners, including Boehly and Bobby Patton, a Texas energy investor and Guggenheim client, not to mention Lakers legend Earvin “Magic” Johnson. But some of the money didn't belong to any of them. Guggenheim owned three insurance companies: Security Benefit Life, EquiTrust Life Insurance Company and Guggenheim Life and Annuity. Those insurers held assets to pay policyholder claims, some of which would go to the Dodgers purchase.
The amount of insurance money in the deal has proved difficult to pin down. The New York Times initially reported the figure as “a big chunk.” The L.A. Times later pegged it at $1.2 billion, or 80 percent of the equity in the team, citing “records obtained by the Times.” But a source close to Guggenheim tells the Weekly that the true figure is much smaller — about $100 million.
That estimate appears to be backed up by the insurance companies' annual statements, which refer to two investments of $50 million and $35 million in entities titled “GBM” — likely for Guggenheim Baseball Management.
When the deal was announced, Major League Baseball owners were astonished at the sale price — and concerned. On a conference call, reported by ESPN, some expressed reservations about the source of Walter's cash.
They worried that using any policyholder funds would invite scrutiny from insurance regulators.
MLB and the Kansas Insurance Department ultimately approved the investment, but not everyone was satisfied. In a blistering column in The New York Times, financial writer Andrew Ross Sorkin wrote, “Using insurance money — which is typically supposed to be invested in safe, simple assets — to buy a baseball team, the ultimate toy for the super-rich, seems like a lawsuit waiting to happen.”
Sure enough, in February 2014, a team of high-powered, class action lawyers filed a 101-page complaint in U.S. District Court in the Northern District of Illinois. The claim accused Walter and his partners of a racketeering conspiracy to “loot” and “plunder” policyholders' money.
The lead attorney was Steve Berman, a nationally known plaintiff's lawyer with a reputation for going hard after big corporations. After the collapse of Enron, his firm, Hagens Berman, sued on behalf of its employees and won $220 million in benefits. Berman sued Toyota over sudden vehicle accelerations, winning a $1.1 billion settlement — and $200 million in attorneys' fees.
The firm also has sued technology companies including Apple and Google, pharmaceutical manufacturers, tobacco companies and many more. Hagens Berman often pursues corporate fraud cases as soon as they hit the headlines. When news broke a couple of weeks ago about Volkswagen cheating on emissions tests, Berman was on it, filing a class action suit within a few hours.
As much as Walter shuns the spotlight, Berman seeks it. The lawsuit against Guggenheim came with a press release and lots of attention-getting allegations. The suit claimed that Guggenheim “took a page out of the Enron playbook,” propping up its insurance companies with “complicated accounting machinations” designed to make them appear healthier than they actually were.
Guggenheim's companies specialized in annuities. While a life insurance policy covers you in case you die too soon, an annuity is the opposite — it covers you in case you live too long. An annuity holder pays cash up front in exchange for a stream of payments that continues until death — which could be many decades away.
Companies that sell such policies are guaranteeing that they will be around long enough to honor them. Berman's lawsuit alleged that Guggenheim's insurance companies had fraudulently misrepresented their financial health and were in fact shakier than they appeared.
“Most egregious,” the suit alleged, was that Guggenheim used the insurance companies “as a cash machine” to help buy the Dodgers — “a highly illiquid and exceptionally speculative investment.”
The suit sought compensation on behalf of anyone who had bought annuities from the Guggenheim companies.
A Guggenheim spokesman called the lawsuit “completely false and without merit.”
“These insurance companies are properly and well capitalized, including capital and reserve requirements well in excess of all regulatory requirements,” the spokesman said.
Class action firms typically invest significant sums and spend many months investigating cases before filing suit, in hopes of reaping a handsome fee award in an eventual settlement. In this instance, the firm dug through insurance filings and public records to develop its case.
So it came as a shock when, a day after Berman filed the suit, he dropped it. No explanation was given. People who follow the industry closely could only scratch their heads.
“That was a very mysterious situation,” says Joseph M. Belth, Indiana University emeritus professor of insurance, who blogs about insurance issues.
Berman declined to comment to the Weekly. One of the plaintiffs in the suit was Clarice Whitmore of Fayetteville, Arkansas. In 2012, she put nearly $45,000 into a Security Benefit annuity. She later claimed that she surrendered her policy — incurring a $5,000 surrender charge — when she learned how allegedly unstable the company really was. Reached by phone a few weeks ago, she said she couldn't talk about the case.
“I signed a nondisclosure,” she said. “I can't comment.”
Los Angeles Dodgers owner Mark Walter, right, converses with Yasiel Puig at batting practice before Game 4 of the National League Championship Series in October 2013.; Credit: Lori Shepler/UPI/Newscom
The suit's legal merits were left untested, but as a work of research, it did shed light on Mark Walter's foray into the insurance business. It also posed questions, which previously had been raised by regulators and competitors, about what exactly he was up to.
As it turns out, Walter was just as mysterious in the insurance business as he was in baseball. Brantley Whitley, an insurance agent who co-hosts a podcast on insurance issues, first came across Guggenheim a few years ago, when a marketing group started pitching him on annuities from one of its companies, Security Benefit.
“I'm like, 'Who?'” he says.
The company, based in Topeka, Kansas, had been around for more than 100 years. But it was small, and in the wake of the 2008 financial crisis, it was in deep trouble. It just barely had enough assets to meet its liabilities, and a significant portion of those assets was tied up in mortgage-backed securities.
Guggenheim bought the company in 2010. It also bought EquiTrust, another struggling insurer, as well as Wellmark, a tiny company that was renamed Guggenheim Life and Annuity. The renamed company took over the annuity business of Standard Life of Indiana, which was in such bad shape that it had been forced into court supervision.
What did Guggenheim want with a bunch of small, struggling life insurance companies? No one knew.
Around this time, Sheryl Moore got a call from a researcher at Guggenheim. Moore runs Wink, an Iowa-based market research firm, and is, as she puts it, “the foremost authority on the annuity business.”
Guggenheim's researcher had a straightforward question.
“They wanted to know what it would take to be No. 1 in the indexed annuity business in two years,” she says. “I laughed at them.”
The business had long been dominated by Allianz, a German firm. Its nearest competitors fought one another bitterly for every tenth of a percent of market share. It was not a game for beginners.
“I told them, 'Good luck. That's impossible,'” she says. “Well, they showed me.”
In 2011, Security Benefit rolled out the Secure Income Annuity. It offered higher commissions to brokers, which helped get the word out, and very attractive terms for policyholders.
“It hit the marketplace with a force,” says Phillips, of Alternative Brokerage. “It was the new shiny thing, and it blew up.”
In its first 18 months on the market, the annuity sold $2.4 billion in premiums. The next year, Security Benefit introduced a second product, the Total Value Annuity, which paid returns based on a proprietary index. No one had seen anything like it before, and it, too, became an instant hit.
By late 2012, they were the two top-selling fixed index annuities in the market. Fueled by that success, Security Benefit was launched into the top ranks of the nation's annuity sellers, finishing second only to Allianz in 2013.
When a new product is popular, competitors scramble to copy it. But according to Phillips, Security Benefit's rivals couldn't figure out how to reverse-engineer its annuities in such a way that they could still make a profit.
“Nearly every actuary in this business has wondered how they are doing what they're doing,” Moore says.
That bred resentment.
“Security Benefit Life had a target on their backs,” she says. “?'Who the hell are these guys?' was the attitude.”
The criticism only grew when Walter and his partners bought the Dodgers partly with insurance company funds.
“Initially it was a huge scandal,” Moore says. “Other companies tried to use it as ammo, saying, 'We're investing in annuity and life insurance, not baseball teams.'”
Nowadays, Dodger fans can't help but have heard of Security Benefit. Watch a game on TV and the company's logo is everywhere — on a billboard above the outfield bleachers, on the LED ribbon that encircles the field and behind home plate.
In the insurance world, however, Security Benefit is still considered a new enough player that many agents won't sell its products. A.M. Best, the ratings agency that issues opinions on the financial strength of insurers, rates Security Benefit a B++. That's five notches below the top. EquiTrust and Guggenheim Life and Annuity have the same rating.
“I wouldn't buy it,” says J. Robert Hunter, director of insurance for the Consumer Federation of America. “That's a really bad investment. When you're talking annuities or life insurance, you're talking 30 to 40 years out. You want A++. You don't want to go down to A.”
When she entered the business 18 years ago, Moore says, it was almost impossible for B-rated companies to sell annuities. Insurance brokers must carry their own insurance, in case anything goes wrong with a policy they sell, and most such policies did not cover B-rated companies.
That's changing, especially in the wake of the financial crisis, when many insurers' ratings were downgraded.
In part, Security Benefit's low rating was a hangover from its struggles under previous management. But it was also the result of the way in which Guggenheim had passed off its liabilities to others.
The amount of an insurance company's surplus — assets minus liabilities — is a measure of financial strength. To get stronger, a company can grow its assets through successful investments. But it can also reduce its liabilities. The way to do that is called reinsurance.
Under a reinsurance agreement, an insurer can off-load a liability onto another company — often, but not always, in exchange for a premium.
That frees up assets so that the company can sell more policies, pay dividends to its investors or just appear to have a larger surplus.
Guggenheim was doing a lot of reinsurance. What's more, the Guggenheim companies were all reinsuring their liabilities with one another.
According to filings reviewed by the Weekly, to date EquiTrust has reinsured $2 billion in liabilities with Guggenheim Life. Guggenheim Life turned around and reinsured $720 million of its own liabilities with EquiTrust. Security Benefit has reinsured $500 million with Guggenheim Life. Guggenheim Life also has reinsured $1.2 billion with Paragon, another Guggenheim-owned company.
What's going on here? All these companies are owned by the same parent company. So what difference does it make which one is responsible for paying customers' claims?
Security Benefit did reinsure some liabilities with one outside company, unloading $1.5 billion of liabilities on Heritage Life. Heritage also took on $1.2 billion from EquiTrust. Heritage is not owned by Guggenheim, but it is owned by Bobby Patton, the Guggenheim client who is a partner in the Dodgers' ownership group. The company does not sell insurance to the general public. It seems to exist solely to accept liabilities from Guggenheim's insurers.
The Guggenheim spokesman noted that all of this was done with the blessing of regulators. “All investments and reinsurance contracts are proper, legal and disclosed,” the spokesman said.
Among insurance regulators, the use of so-called “captive” companies for reinsurance is a source of intense controversy. Benjamin Lawsky, the former head of the New York Department of Financial Services, while not referring to Guggenheim specifically, dubbed it “shadow insurance.” He warns that it makes companies unstable and often compares it to the highly leveraged and opaque transactions that brought on the 2008 financial crisis.
“The fact that certain insurers are inappropriately using shell games to hide risk and loosen reserve requirements is greatly troubling,” Lawsky wrote in a 2013 report. In a 2014 letter, he called it “a gaping regulatory problem that is central to the safety and soundness of our system.”
In the insurance industry, there are two camps. The first believes that state regulators have set reserve requirements too high — that the amount the states require companies to hold on their books is greater than what they actually need to pay claims. This view is held by the American Council of Life Insurers, the dominant trade organization, and the insurers it represents.
The second camp prefers to err on the side of conservatism. Given the stakes — trillions of dollars in premiums — the conservative camp contends that companies cannot be left to decide on their own how much to hold in reserves. Included in this camp are some conservative insurers — New York Life and Northwestern Mutual, in particular — which have a lot to lose from the riskier approach of their competitors.
Lawsky is the hero of the conservative camp. During his tenure, he built a reputation as a crusader against Wall Street, much as Eliot Spitzer had done before him. The Village Voice depicted Lawsky on its cover as an Old West sheriff, with a shotgun and a 10-gallon hat.
His 2013 report on “shadow insurance” contended that companies were using reinsurance to get around state reserve requirements. Companies could lower the amount of assets they were required to hold by off-loading their liabilities. Those assets could then be used for purposes other than paying claims. Lawsky called it a shell game.
Dodger fans are familiar with the game that plays on the scoreboard between innings. Three baseball helmets are shuffled around, and fans have to guess which one holds the ball. Lawsky claimed that's what insurers were doing with their liabilities.
“A shell game can only survive with secrecy,” says Belth, the professor. “If you show where all the bodies are buried, it's not gonna be secret anymore, and the shell game's not going to work. The degree of secrecy is astounding.”
Lawsky's report was the first to expose the issue to the light of day. It caught the attention of class action lawyers. It inspired Steve Berman's lawsuit against Guggenheim, which rested heavily on claims about shadow reinsurance. After that case was dropped, similar suits were filed by other class action firms against AXA Equitable and MetLife.
This summer, Berman filed a new lawsuit, largely mirroring the Guggenheim case, against Athene Annuity and Life. That case is still pending. In one way or another, each of these suits is attempting to carve new legal territory.
Randall Mims, a consultant with expertise on reinsurance, said he believed the Guggenheim suit was “pretty frivolous.”
“Security Benefit is in a much stronger position than it was five years ago,” he says. “I don’t see how Guggenheim’s fleecing the company. It looks like they’re building the company.”
One challenge in bringing such suits is that regulators have approved these agreements.
“If it's so illegal,” Moore asks, “why would an insurance commissioner allow it?”
Another challenge is proving that policyholders have suffered some sort of harm. So far, none of these companies has missed a payment because of shadow reinsurance. The threat, if it's real, may be well in the future.
“You don't really know about a collapse until it happens,” Belth says.
He and others warn about the possibility of another credit crisis. Firms that are highly leveraged — and thus weakened — may suddenly find themselves unable to pay claims.
“What happens if you have some kind of catastrophe?” Hunter asks. “Some black swan that puts pressure on the industry — then what happens? That's where consumers get clobbered.”
In many ways, Walter's track record as owner of the Dodgers mirrors his history in life insurance. He came seemingly from nowhere, took over an ailing franchise and poured money into it. In a very short period, he launched it to the top of the industry.
But if the parallel holds, then the Dodgers could be in for a change of fortune.
After a couple years near the top of the market, Guggenheim's most profitable company, Security Benefit, tumbled in the rankings of fixed index annuity sellers. Without much explanation, it withdrew one of its top-selling annuities and changed the terms of the other in a way that made it significantly less attractive. The company that two years ago finished second among its peers is now in fifth place.
Could the same thing happen to the Dodgers?
On the one hand, the team is flush with guaranteed money thanks to its staggering $8.35 billion deal with Time Warner Cable. On the other, that deal has been horrible for fans. Time Warner Cable has been unable to get DirecTV and other distributors to pay its high price for the rights, leaving two thirds of the market unable to see the games.
Most industry watchers believe the dispute will be resolved in time for the 2016 season, once Time Warner Cable completes its merger with Charter Communications. That view is not unanimous, as SNL Kagan has warned that the blackout could continue into 2017.
The standoff is troubling because it suggests that the Dodger TV rights — and thus the team — are not as valuable as Walter and his partners projected.
Around baseball, the resurgence of the Dodgers has been widely hailed. Walter has hired smart baseball executives who believe in rigorous analytics and who have been given seemingly unlimited funds to remake the team.
“This is a courageous group of executives,” says Marc Ganis, president of Sportscorp Ltd., a consulting firm. “They're not afraid to make the big trade, to take the big salary. … That bodes very well for the long-term prospects of the team.”
But if Walter's maneuvers with Security Benefit serve as an omen, the Dodgers' future is anything but certain.
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