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Shrinking Guggenheim life unit to disappear in intercompany merger

A company formed seven years ago in connection with the reorganization of Standard Life Insurance Co. of Indiana will soon be going away.

Guggenheim Capital LLC plans to merge Paragon Life Insurance Co. of Indiana with and into the affiliated Guggenheim Life & Annuity Co. after concluding that it no longer made sense for the company, which experienced a considerable decline in the size of its balance sheet during the first nine months of 2017, to maintain its separate existence.

The boards of Paragon Life and Guggenheim Life & Annuity agreed to the transaction Sept. 11, 2017, according to a merger application obtained Feb. 16 by S&P Global Market Intelligence. Paragon Life's assets and liabilities will become assets and liabilities of Guggenheim Life & Annuity under terms of the deal, which was scheduled to have been the subject of a Feb. 8 public hearing before the Delaware Department of Insurance.

Paragon Life traces its roots to a December 2010 agreement involving Guggenheim Life & Annuity and the Indiana Department of Insurance in its capacity as Standard Life's receiver. The agreement, among other things, was designed to permit Standard Life annuitants to realize 100% of their cash values. The insurer was placed into rehabilitation in December 2008 as the company's claims-paying ability was jeopardized by its relatively high levels of exposure to subprime-related investments. A liquidation process commenced more than one year after the Guggenheim Life & Annuity agreement closed.

The apparent end to another arrangement immediately preceded the entry of the intercompany merger. As Guggenheim Life & Annuity assumed and retroceded to Paragon Life in early 2011 selected blocks of Standard Life individual fixed deferred annuities, it also retroceded certain fixed deferred annuities assumed as part of a coinsurance agreement with the unaffiliated ELCO Mutual Life & Annuity.

That company, which was then known as Employees Life Co. (Mutual), originally ceded a $110 million block of policies to Guggenheim Life & Annuity in March 2010. It later expanded the agreement to include coinsurance and began ceding 100% of all sales of a new portfolio of deferred annuities.

"Guggenheim Life & Annuity maintains a high level of surplus and has access to additional capital through its parent," ELCO Mutual said in its 2011 annual statement. "Guggenheim is a niche marketer willing and anxious to do business with us."

ELCO Mutual subsequently entered another 100% coinsurance agreement with Guggenheim Life & Annuity that involved the cession of $317 million of reserves in 2013. Assumptions under the two agreements accounted for $1.41 billion of the $6.68 billion in reserves assumed by Guggenheim Life & Annuity at year-end 2016. Guggenheim Life & Annuity, in turn, retroceded a total of $1.16 billion in reserves to Paragon Life as of Dec. 31, 2016.

Circumstances changed, however, in August 2017. Guggenheim Life & Annuity recaptured the ELCO Mutual-related business from Paragon Life as the original cedant decided to recapture the business, Paragon Life reported in its most recent quarterly statement. Guggenheim Life & Annuity's Sept. 30, 2017, income statement showed an entry of $932.2 million related to the recapture from Paragon Life, offset by a negative $1.02 billion associated with ELCO Mutual's recapture. ELCO Mutual did not make reference to a recapture in its most recent quarterly statement.

For Paragon Life, its aggregate reserve for life contracts tumbled to $169.7 million as of Sept. 30, 2017, from $1.13 billion at the end of 2016. Its total liabilities plunged to $891.3 million from $1.66 billion over that nine-month span, with a $379.2 million liability for deposit-type contracts representing its largest single entry on that side of its balance sheet. As part of the Standard Life reorganization, Paragon Life assumed the administration of fixed-maturity funding agreements issued that the former insurer had issued to the Federal Home Loan Bank of Indianapolis, and that arrangement historically accounted for a majority of its liability for deposit-type contracts.

Guggenheim Life & Annuity said in the merger application that the block of business it did not recapture from Paragon Life "has shrunk considerably." Additionally, Paragon Life has no direct employees and all its administrative functions are performed by Guggenheim employees.

The Guggenheim Capital life group as consolidated by S&P Global Market Intelligence ranked 31st in the U.S. life industry as of year-end 2016 based on its $5.14 billion in aggregate reserves for individual fixed annuities. It also maintained $3.92 billion in reserves associated with individual indexed annuities.