\u201cI\u2019ve been seeing warning signs for years, and I\u2019ve been very vocal about it,\u201d Gober, 66, said in a recent interview in his living room. More recently, he\u2019s been paying attention to what he says is the most troubling development yet: The influx of private equity\u2019s billions. <\/p>\n
The industry waves off its critics as needlessly alarmist, always predicting a disaster that never comes. But that mid-October afternoon, Gober\u2019s phone began to light up. Josh Wander<\/a>, the co-founder of 777 Partners<\/a>, a private equity firm on Gober\u2019s radar, had been charged with cheating investors and lenders out of almost $500 million \u2014 an alleged fraud enabled in part by its opaque and intricate ties with some US insurance companies. <\/p>\n For Gober, the possible misbehavior at a small shop is just a symptom. He\u2019s 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.<\/p>\n 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<\/a> 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.<\/p>\n Even absent a severe shock, insurance is now so deeply woven into the financial system that a problem at one company \u201cmay be more likely to spread,\u201d the economists wrote. UBS Group AG<\/a> Chairman Colm Kelleher<\/a> echoed the sentiment at a global financial summit in Hong Kong earlier this month: \u201cIf we look at the insurance business, to me, there is a looming systemic risk coming through,\u201d he said.<\/p>\n This story is the final installment in a four-part Bloomberg series that examines how Wall Street firms are transforming life insurers \u2014 pursuing higher profits by re-engineering balance sheets and buying more complex and potentially harder-to-sell assets.<\/p>\n 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\u2019t or wouldn\u2019t adopt \u2014 one that private equity owners are ideally equipped to manage. <\/p>\n 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.<\/p>\n The industry also points to its average risk-based capital ratio \u2014 a measure of financial strength relative to regulatory requirements \u2014 which decreased since its 2014 peak but stood at 434% at the end of last year<\/a> \u2014 more than double what would trigger additional oversight. <\/p>\n The recent collapse of Connecticut life insurer PHL Variable Insurance Co.<\/a> 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.<\/p>\n It\u2019s a black mark on an industry that sells products designed to ensure security that traditional investments can\u2019t. When someone buys an annuity, for example, they forgo potentially higher market returns in favor of a preset, guaranteed income stream \u2014 a tradeoff that\u2019s increasingly persuasive to millions of graying baby boomers.<\/p>\n Demand for Retirement Income Has Led to Annuities Surge<\/p>\n Premiums paid into life insurance policies and annuities<\/p>\n Annuities sales rose to $434 billion in 2024<\/a>, almost doubling in just four years. Gober said he\u2019s spoken with \u201cthousands of policyholders,\u201d and they don\u2019t tend to grasp the potential risks. \u201cNever 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.\u201d<\/p>\n Born and raised in Mississippi, Gober got into insurance after a brief, mind-numbing post-MBA stint at Merrill Lynch<\/a>. He returned to his business school\u2019s career center looking for a way to \u201cuse my brain,\u201d he said. They pointed him to an opening for an examiner at the state insurance department, writing reports on local firms\u2019 financial condition and market conduct. Eventually he set up his own forensic accounting practice. <\/p>\n Over the years he\u2019s 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.<\/p>\n \u201cI look after the consumer, and that\u2019s what I\u2019ve focused on mostly throughout my career,\u201d Gober said. \u201cThe industry really doesn\u2019t need protection.\u201d<\/p>\n 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 \u2014 and less constrained by the rules that now applied to banks. <\/p>\n It didn\u2019t take long for private equity firms to identify benefits to having more direct influence over their new clients. Apollo Global Management Inc.<\/a> 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.<\/a> and Ares Management Corp.<\/a>, own insurance companies.<\/p>\n That\u2019s 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.<\/p>\n \u201cPrivate equity didn\u2019t have to come in and start from scratch,\u201d Gober said. \u201cThey already saw what the industry was doing \u2014 they just took it and ramped it up to the max.\u201d<\/p>\n After a decade of intense financial engineering, the numbers are dizzying: About one-third of the industry\u2019s $6 trillion of assets are parked in some form of private credit, according to Moody\u2019s Ratings. That runs the gamut from straightforward individual loans to the most esoteric structured debt, like net-asset-value loans<\/a>, which are issued against portfolios of private equity investments.<\/p>\n 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<\/a> from economists at the Federal Reserve Bank of Chicago. Those investments in turn support their ability to sell more annuities, they wrote.<\/p>\n Most Insurance Executives Planned to Invest More in Private Credit<\/p>\n Many senior industry leaders said they’d add illiquid assets in 2025<\/p>\n But there\u2019s growing concern that those high returns benefit from managers\u2019 optimism about the value of their holdings, a luxury unavailable to their peers trading public instruments. There can be wide variation in how managers \u201cmark\u201d identical private assets, with some holding values steady while others report deep losses<\/a>.<\/p>\n In a recent study, a trio of academics referred to this as \u201cmark to myth<\/a>\u201d accounting, writing that it \u201craises serious questions about the transparency, accuracy and inherent riskiness of reported performance metrics.\u201d<\/p>\n \u201cThe data that underpins those assets \u2014 the probability of recovery, and various important aspects \u2014 may not be as transparent as, say, a commercial bond,\u201d said Jeremy Levitt, chief executive officer of actuarial firm Graeme Group.<\/p>\n 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. <\/p>\n As the private credit market has surged, the industry has turned to small ratings companies. US regulators are scrutinizing one of them<\/a>, Egan-Jones Ratings Co.<\/a>, which graded thousands<\/a> of issues last year with a staff of roughly 20 analysts. In a presentation to investors earlier this month, KKR & Co. publicly distanced<\/a> its insurer, Global Atlantic, from Egan-Jones, emphasizing that the majority of its assets are rated by S&P Global Ratings, Moody\u2019s or Fitch Ratings. <\/p>\n Without naming names, UBS\u2019s Kelleher highlighted rating agencies as a critical weakness in the insurance industry. \u201cWe\u2019re beginning to see huge rating agency arbitrage in the insurance business,\u201d he said, likening it to the problems in the subprime mortgage market in 2007. \u201cWhat you see now is a massive growth in small rating agencies ticking the box for compliance.\u201d<\/p>\n Top fund managers have also warned of red flags in private credit in particular. \u201cI\u2019m afraid that\u2019s just the beginning,\u201d Gober said. \u201cWith private equity imposing private investments on their insurers, there\u2019s just too big a question mark on those assets\u2019 realizable value.\u201d<\/p>\n Private equity firms say they bring an updated investing acumen to an industry that\u2019s historically been fairly conservative. Under their influence, insurance companies increased their investments in private assets \u2014 including those offered by their corporate parents and affiliates.<\/p>\n At times, the tie-ups are extensive. At the end of 2024, Security Benefit Life Insurance Co.<\/a>, the Topeka, Kansas-based firm owned by Todd Boehly\u2019s Eldridge, had more than a quarter<\/a> 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.<\/p>\n In the event of a downturn, \u201clarge investments in affiliated paper will plummet much faster and much deeper than market-traded paper,\u201d Gober said. \u201cIt basically amounts to IOUs between family members.\u201d<\/p>\n 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.<\/p>\n \u201cThere 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,\u201d said Jamie Tucker, an analyst for Fitch.<\/p>\n Offshore reinsurance represented more than 60% of the total bought by US insurers in 2024, roughly double the share in 2019 \u2014 a trend that\u2019s making Gober anxious.<\/p>\n If things go wrong overseas, resolution can drag. When insurer Reciprocal of America went into receivership because its Bermuda-based reinsurer couldn\u2019t pay its claims, Gober pointed out, it took almost three years before policyholders got even a small fraction of what they were owed.<\/p>\n 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 \u201cthe total amount of resources that would be required to bail out that group of companies,\u201d they wrote.<\/p>\n 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.<\/p>\n That\u2019s 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\u2019s co-founder, has denied the charges. <\/p>\n 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.<\/p>\n Insurers Now Rely More on Offshore Firms to Share Risk<\/p>\n Premiums paid by US life insurers to reinsurance companies<\/p>\n \u201cThere isn\u2019t necessarily a track record in the past where the industry was as heavily invested in those kinds of assets,\u201d said Tim Zawacki, an analyst at S&P Global Market Intelligence.<\/p>\n Traditionally, insurers haven\u2019t 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.<\/p>\n But the increased sales of annuities change the calculus, because those products can be redeemed for cash, less a \u201csurrender penalty.\u201d If a critical number of US households decide they want to cash out, \u201cyou could have lots of money demanded, and you don\u2019t have enough short-term assets to pay them,\u201d Gober said. \u201cWhat happens? Fire sale.\u201d<\/p>\n That\u2019s roughly what happened to Italian insurer Eurovita<\/a> 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<\/a>. 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.<\/p>\n![\"Fraud](\"https:\/\/www.newsbeep.com\/nz\/wp-content\/uploads\/2025\/11\/-1x-1.webp.webp\")
Tom Gober Photographer: Nate Smallwood for Bloomberg<\/p>\n![\"An](\"https:\/\/www.newsbeep.com\/nz\/wp-content\/uploads\/2025\/11\/1763722008_786_-1x-1.webp.webp\")
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