Falcone’s Surprise Split From Harbinger
December 1, 2014 by Linda Koco
In what some observers are describing as an abrupt departure, Philip Falcone will resign as chairman and CEO of Harbinger Group Inc. (HGI), effective Dec. 1.
The news is of interest to insurance professionals because HGI is owner of annuity carrier Fidelity & Guaranty Life (FGL), among other holdings. The carrier has some relatively recent corporate history that keeps insurance minds wondering where the business is heading.
Falcone is part of that history because he has been running HGI since its acquisition of FGL in 2011. Might that acquisition somehow be behind the split? Probably not.
The acquisition
The acquisition was definitely out of the ordinary, however.
HGI acquired the carrier after Falcone’s hedge fund, Harbinger Capital Partners, bought OM Financial Life from Old Mutual in 2011. The transaction drew regulatory attention from state insurance commissioners who were investigating whether private equity’s short-term business model imposes undue risk on insurance companies, which are long-term by nature. The regulators’ interest was piqued because some considered Harbinger Capital to be a private equity firm.
Following the purchase, Harbinger Capital had quickly transferred the insurance company to HGI, which is a diversified holding company, not a private equity firm. Harbinger Capital, together with its affiliated funds, is one of the largest shareholders of HGI.
Once the deal was consummated, HGI renamed the carrier Fidelity & Guaranty Life, the insurer’s original name. But HGI’s link to private equity triggered regulatory scrutiny anyhow, at least initially, since regulators weren’t sure of the business structure or of the influence that Harbinger Capital might have over FGL operations.
In the ensuing months, the initial concerns gradually faded as HGI clarified its holding company status and took steps to emphasize the more traditional structure of a holding company owning an insurance company subsidiary. In December 2013, FGL went public via an initial public offering. In October of this year, the carrier brought in veteran insurance executive Christopher J. Littlefield as its new president, succeeding Lee Launer, who is now FGL’s CEO. Meanwhile, Falcone focused on running HGI.
Surprising
But now, HGI has announced his resignation. The news broke four days after HGI released its fourth quarter fiscal results. In that report, there was no mention of pending executive changes at the top, and the results were glowing. HGI had “record annual results for consolidated revenue,” the said the financial statement posted on its website.
So, a lot of people were surprised to learn of Falcone’s departure. Speculations are already circulating about possible reasons.
Could FGL’s performance be somehow tangled up in this? That’s one question which is floating around insurance circles. It’s unlikely that this is the case, since FLG seems to be on the grow.
FGL “more than doubled its annuity sales in both the quarter and the year, and continues to increase its GAAP book value, which grew 45 percent over the course of the year,” said HGI’s president, Omar Asali, in the company’s fourth quarter fiscal report. Annuity sales increased 114 percent in fiscal 2014, to $2,161.2 million, the report said, and FGL’s fixed indexed annuities “grew by 91 percent over the fiscal 2013 quarter and by 20 percent on a sequential basis.”
Furthermore, on an industrywide basis, FGL has been gaining ground. For the first nine months this year, the carrier ranked in 10th place in industrywide indexed annuity sales, up from 11th place in the same period one year ago, according to Wink, Inc.
Another possibility has to do with the price of HGI stock. A Bloomberg news report on the development said that, according to someone familiar with the company, some Harbinger investors felt that replacing Falcone may lift the stock.
Still others have suggested that Falcone’s 2013 settlement with the Securities and Exchange Commission may have made some investors uncomfortable enough to nudge him to leave HGI. That settlement came in response to various allegations, including charges that Falcone had “improperly used $113 million in fund assets to pay his personal taxes.” The SEC not only required Falcone and Harbinger Capital to pay more than $18 million and admit wrongdoing. It also barred him from the securities industry for at least five years, and “from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization” for five years.
What’s next?
Whatever the reason, Falcone is departing with a lot of money. He gets a one-time payment of $20.5 million, $16.5 million in a 2014 bonus, and $3.3 million in bonus for fiscal 2015, HGI said.
Looking ahead, HGI said that Falcone and Keith Hladek (an HGI director who is resigning from the board) “are expected to dedicate their efforts to HC2 Holdings, Inc. and Harbinger Capital Partners, LLC.”
Falcone is chairman, president and CEO of HC2 Holdings, which has businesses in steel, engineering, marine and communications services. He is also chief investment officer and CEO of Harbinger Capital Partners, the hedge firm he founded.
HGI has named Joseph S. Steinberg, an independent member of the board, as its new chairman. A search is underway for a new CEO.
