How Private Equity’s $700 Billion Insurance Move Puts US Retirees at Risk

Markets
The Risks Lurking in Wall Street’s Insurance Takeover
No one worries about the insurance industry quite like Tom Gober.
From his home office outside of Pittsburgh, the forensic accountant has been tracking, documenting and highlighting the weaknesses of the $9.3 trillion sector responsible for the financial well-being of millions of Americans.
“I’ve been seeing warning signs for years, and I’ve been very vocal about it,” Gober, 66, said in a recent interview in his living room. More recently, he’s been paying attention to what he says is the most troubling development yet: The influx of private equity’s billions.
The industry waves off its critics as needlessly alarmist, always predicting a disaster that never comes. But that mid-October afternoon, Gober’s phone began to light up. Josh Wander, the co-founder of 777 Partners, a private equity firm on Gober’s radar, had been charged with cheating investors and lenders out of almost $500 million — an alleged fraud enabled in part by its opaque and intricate ties with some US insurance companies.
For Gober, the possible misbehavior at a small shop is just a symptom. He’s far more concerned about the bigger picture. With private equity now in control of almost $700 billion of life insurance assets, the industry has devoted more funds to private and structured credit, invested in affiliated entities and enthusiastically embraced complex moves offshore that allow them to take on more risk.
Executives, government watchdogs and economists are worried, too. Less than a year ago, federal regulators were briefed on the rapid changes in the industry and their potential ramifications. Last month, economists at the Bank for International Settlements estimated that publicly traded North American life insurers would face a capital shortfall of about $150 billion in the event of a severe economic downturn, more than triple the figure two decades ago.
Even absent a severe shock, insurance is now so deeply woven into the financial system that a problem at one company “may be more likely to spread,” the economists wrote. UBS Group AG Chairman Colm Kelleher echoed the sentiment at a global financial summit in Hong Kong earlier this month: “If we look at the insurance business, to me, there is a looming systemic risk coming through,” he said.
This story is the final installment in a four-part Bloomberg series that examines how Wall Street firms are transforming life insurers — pursuing higher profits by re-engineering balance sheets and buying more complex and potentially harder-to-sell assets.
The industry has long positioned its products as market solutions to big social problems, an antidote to the growing strain on Social Security and the uncertainties around public and private pensions. But providing the guarantees Americans want and returns to investors, proponents say, requires a measure of risk-taking that the old structures couldn’t or wouldn’t adopt — one that private equity owners are ideally equipped to manage.
To customers, insurers emphasize the structural backstops in the event a company falls short of its obligations. They tout their historical reputation for stability, highlighting the investment-grade ratings on the majority of their holdings.
The industry also points to its average risk-based capital ratio — a measure of financial strength relative to regulatory requirements — which decreased since its 2014 peak but stood at 434% at the end of last year — more than double what would trigger additional oversight.
The recent collapse of Connecticut life insurer PHL Variable Insurance Co. raised new questions about the adequacy of historic safety nets. After almost a decade of private equity ownership, the firm has been under enough strain to draw closer supervision, eventually revealing a $2.2 billion shortfall. Now the state has frozen $400 million in payments, leaving thousands of policyholders in limbo.
It’s a black mark on an industry that sells products designed to ensure security that traditional investments can’t. When someone buys an annuity, for example, they forgo potentially higher market returns in favor of a preset, guaranteed income stream — a tradeoff that’s increasingly persuasive to millions of graying baby boomers.
Annuities sales rose to $434 billion in 2024, almost doubling in just four years. Gober said he’s spoken with “thousands of policyholders,” and they don’t tend to grasp the potential risks. “Never have they been aware of the fact that it will take them years to get even a portion of their money back if their insurer went bust.”
Born and raised in Mississippi, Gober got into insurance after a brief, mind-numbing post-MBA stint at Merrill Lynch. He returned to his business school’s career center looking for a way to “use my brain,” he said. They pointed him to an opening for an examiner at the state insurance department, writing reports on local firms’ financial condition and market conduct. Eventually he set up his own forensic accounting practice.
Over the years he’s been called to consult with or testify for the US Department of Justice and made referrals to the Federal Bureau of Investigation. Recently, he briefed the Department of Labor and Senate Banking Committee on the risks in the life insurance and annuity industry.
“I look after the consumer, and that’s what I’ve focused on mostly throughout my career,” Gober said. “The industry really doesn’t need protection.”
From his perch, Gober has registered broad changes in the industry, but none so fast and dramatic as the years following the 2008 financial crisis. Banks faced new, stricter capital requirements that encouraged them to pull back from lending and made way for private investors, who then packaged and sold off those loans. They found ready buyers in insurance companies searching for higher yields — and less constrained by the rules that now applied to banks.
It didn’t take long for private equity firms to identify benefits to having more direct influence over their new clients. Apollo Global Management Inc. led the way, establishing the insurer Athene in 2009 and building it out with acquisitions. Now almost all major alternative asset managers, including KKR & Co. and Ares Management Corp., own insurance companies.
That’s juiced demand for private and illiquid assets from their own affiliates and from publicly traded insurers eager to keep pace, a boon to the biggest US firms, where fee-paying assets have almost tripled to more than $3.5 trillion since 2019.
“Private equity didn’t have to come in and start from scratch,” Gober said. “They already saw what the industry was doing — they just took it and ramped it up to the max.”
After a decade of intense financial engineering, the numbers are dizzying: About one-third of the industry’s $6 trillion of assets are parked in some form of private credit, according to Moody’s Ratings. That runs the gamut from straightforward individual loans to the most esoteric structured debt, like net-asset-value loans, which are issued against portfolios of private equity investments.
For industry executives, the swelling allotments are warranted. Private placements provide yields as much as 80 basis points higher than comparable public bonds, according to a June paper from economists at the Federal Reserve Bank of Chicago. Those investments in turn support their ability to sell more annuities, they wrote.
But there’s growing concern that those high returns benefit from managers’ optimism about the value of their holdings, a luxury unavailable to their peers trading public instruments. There can be wide variation in how managers “mark” identical private assets, with some holding values steady while others report deep losses.
In a recent study, a trio of academics referred to this as “mark to myth” accounting, writing that it “raises serious questions about the transparency, accuracy and inherent riskiness of reported performance metrics.”
“The data that underpins those assets — the probability of recovery, and various important aspects — may not be as transparent as, say, a commercial bond,” said Jeremy Levitt, chief executive officer of actuarial firm Graeme Group.
US life insurers say the vast majority of their holdings are rated investment-grade, independently deemed at low risk of default. At the end of last year, about 96% of bonds and 95% of asset-backed securities held by private equity-owned insurers had received that stamp of approval.
As the private credit market has surged, the industry has turned to small ratings companies. US regulators are scrutinizing one of them, Egan-Jones Ratings Co., which graded thousands of issues last year with a staff of roughly 20 analysts. In a presentation to investors earlier this month, KKR & Co. publicly distanced its insurer, Global Atlantic, from Egan-Jones, emphasizing that the majority of its assets are rated by S&P Global Ratings, Moody’s or Fitch Ratings.
Without naming names, UBS’s Kelleher highlighted rating agencies as a critical weakness in the insurance industry. “We’re beginning to see huge rating agency arbitrage in the insurance business,” he said, likening it to the problems in the subprime mortgage market in 2007. “What you see now is a massive growth in small rating agencies ticking the box for compliance.”
Top fund managers have also warned of red flags in private credit in particular. “I’m afraid that’s just the beginning,” Gober said. “With private equity imposing private investments on their insurers, there’s just too big a question mark on those assets’ realizable value.”
Private equity firms say they bring an updated investing acumen to an industry that’s historically been fairly conservative. Under their influence, insurance companies increased their investments in private assets — including those offered by their corporate parents and affiliates.
At times, the tie-ups are extensive. At the end of 2024, Security Benefit Life Insurance Co., the Topeka, Kansas-based firm owned by Todd Boehly’s Eldridge, had more than a quarter of its $49 billion of invested assets in collateral loans to entities also controlled by the billionaire. In response to questions about the strategy last year, the company pointed to its market-beating returns.
In the event of a downturn, “large investments in affiliated paper will plummet much faster and much deeper than market-traded paper,” Gober said. “It basically amounts to IOUs between family members.”
At the same time, private equity has moved to set up offshore reinsurance companies, often to service their US-based units. Bermuda has been the leading destination, but other places are starting to gain traction.
“There are other offshore regimes which are less transparent, less sophisticated, less prescriptive, generally more flexible, which just leads to more questions as to the amount of capital insurers are holding,” said Jamie Tucker, an analyst for Fitch.
Offshore reinsurance represented more than 60% of the total bought by US insurers in 2024, roughly double the share in 2019 — a trend that’s making Gober anxious.
If things go wrong overseas, resolution can drag. When insurer Reciprocal of America went into receivership because its Bermuda-based reinsurer couldn’t pay its claims, Gober pointed out, it took almost three years before policyholders got even a small fraction of what they were owed.
In 2008, the S&P 500 lost nearly 40%. Basing their projections on a similar scenario, BIS economists have found that publicly held US life insurers, typically considered more risk-averse than their private equity-sponsored rivals, would face a capital shortfall of $150 billion. The sum represents “the total amount of resources that would be required to bail out that group of companies,” they wrote.
Even if market leader Athene, with more than $30 billion of regulatory capital, could weather a storm, there are concerns that as scores of insurers embrace variations of its strategy, the risks to the financial system grow.
That’s setting aside the kind of fraud alleged in the case of 777, where the former chief financial officer has pleaded guilty. A lawyer for Wander, the firm’s co-founder, has denied the charges.
It also might not take such a dramatic downturn. Gober and other observers point out that insurers have never had such complicated portfolios nor relied so heavily on offshore backstops. The rising allocation to certain types of structured securities, which give the industry exposure to high-yield corners of the market, comes at the expense of liquidity, raising the risks of a cash crunch.
“There isn’t necessarily a track record in the past where the industry was as heavily invested in those kinds of assets,” said Tim Zawacki, an analyst at S&P Global Market Intelligence.
Traditionally, insurers haven’t worried too much about liquidity: Most life insurance policies are designed to be redeemed upon death, not before. Outside of the pandemic, mortality rates have been fairly well understood.
But the increased sales of annuities change the calculus, because those products can be redeemed for cash, less a “surrender penalty.” If a critical number of US households decide they want to cash out, “you could have lots of money demanded, and you don’t have enough short-term assets to pay them,” Gober said. “What happens? Fire sale.”
That’s roughly what happened to Italian insurer Eurovita in 2023. Rising interest rates and higher-than-expected customer withdrawals created a liquidity crisis, and its UK-based private equity parent, Cinven, initially refused to inject as much capital as regulators requested. The government froze redemptions to prevent further contagion, and the ultimate rescue drew on the resources of five insurance companies and more than 20 banks.
Defenders of the industry might point out that even the 2008 crisis at American International Group Inc. — while it required a $182 billion government bailout — never directly threatened its retail policyholders. Nonetheless, Gober said, if the prospect of insolvency begins to swirl in the marketplace, reasonable customers might seek to get their money while they still can. “I hate to say this, but it’s just like banks,” he said. “There’s gonna be a feeding frenzy, people are gonna want their money.”
The National Association of Insurance Commissioners, a standard-setting body for the industry in the US, is considering changes to its approach to regulatory capital and credit ratings, and to increase scrutiny around some offshore reinsurance. Its global counterpart, the International Association of Insurance Supervisors, this month highlighted increased allocations to private assets and offshore reinsurance, describing them as structural shifts that, while they may offer benefits, “may also pose potential financial stability risks.”
For Gober, the days of screaming into the void are over. “Independent sources are starting to talk about these worrisome things,” he said. “People are starting to listen.”