High above Philadelphia, the business of helping hedge-fund investors avoid income taxes is looking up.
Annuities — investments baked into life-insurance policies to make them tax-free — have a history of high fees, state regulation that favors companies over investors, and marketing campaigns that target retirement savers. And that last group doesn’t have to pay taxes anyway, so what’s the point?
But one visionary Center City-based business, allied with some of the biggest firms on Wall Street, has found a way to wrap the tax advantages of insurance around sophisticated investments for larger investors to realize bigger tax savings.
Pro “athletes, celebrities, and family offices are embracing private-placement life insurance, or PPLI, as a way to preserve wealth for their heirs,” Bloomberg LP reported last week.
The policies help clients with at least $2 million to buy an account, “invest in hedge funds and avoid paying taxes forever” on gains from other investments, CEO-sized paychecks, and valuable property. They can’t spend the assets without paying taxes — but they can take out tax-free loans against the value of the property in the insurance accounts, which is almost as good.
These savings have become more attractive since the Trump tax reforms curtailed other taxpayer deductions, such as investment management fees. Hedge funds such as Third Point, whose founder, Dan Loeb, forced Dow Chemical Co. to merge with DuPont, and Kynikos Associates, whose founder Jim Chanos gambled (and often lost) millions of dollars in Philadelphia city pension money on high-risk bets, are helping clients buy life insurance so they can collect investments in those funds tax-free, according to the report.
Most of the money invested in these policies — $3 billion in the last year, Bloomberg says — has flowed from clients of JPMorgan & Co., Bank of New York Mellon Corp., and other big trust banks into Lombard International, based in the tax haven of Luxembourg but run for U.S. clients from the former Cigna executive suite atop One Liberty Place.
Lombard is the successor to Philadelphia Financial, founded in 1996 by John Hillman, once an insurance accountant at the former Arthur Andersen accounting firm, who moved the business downtown from Blue Bell in the recession recovery year 2010, when he employed 35 people.
Hillman told me in 2010 he found Philadelphia to be “a convenient base because it’s close to financial markets in New York and financial regulators in Washington, but it’s also less expensive and cluttered.”
“We are on an acquisition trail, and will build out internationally,” he told me at the time.
Hillman and his investors, with capital from JPMorgan, Bank of America, and UBS, went on to buy Phoenix Life and Reinsurance Co. of New York in 2010, and Hartford Financial Services‘ much-larger insurance/private investments business the next year.
In 2015, he sold the business to Lombard Assurance, a unit of Blackstone Group, the hedge fund cofounded by Abington native Steve Schwarzman, for $155 million. Philadelphia Financial had worked with Blackstone for several years before they tied the knot.
Blackstone left Hillman and his team in charge. He runs the business to this day; it employs 600 worldwide, including more than 100 in Philadelphia. (In keeping with Blackstone policy, Hillman’s office said he couldn’t comment for this piece.)
Blackstone’s own clients include the Pennsylvania, New Jersey, and Philadelphia state pension funds, which have collectively paid the company hundreds of millions of dollars in fees and shared profits since the early 2000s in search of higher-than-market returns (which they sometimes scored, sometimes missed, and in other cases are still waiting for).
Philadelphia officials tried for many years to pitch Center City as a cheaper operating base for financial firms, compared with the New York area. But few companies have made that choice; Wells Fargo, Cigna, and other once-dominant financial employers, after buying some of the city’s oldest financial institutions, have moved thousands of jobs out of Center City over the last 20 years, though Chubb (formerly INA), PNC (ex-Provident), and the “wealth management” offices of a number of large national and foreign banks still occupy sections of high-rise office towers. Even, Malvern investment giant Vanguard Group opened a small office last year in Center City for the first time since the 1990s.
Center City worked for Hillman’s firm because he is local — a graduate of St. Joseph’s University and then-called Bishop Egan High School — and because his well-paid staff could afford the extra tax, parking, and other costs of doing business in town better than the mass-market mortgage companies that gravitated to Horsham, the credit card banks of Wilmington, or the big mutual-fund firms that settled in the western suburbs.
Which is the bottom line in this most bottom-line business: Like other investment and tax-shelter firms, these days, Lombard could locate just about anywhere the boss wants to work.