Private equity firms and other alternative asset managers — including Ares Management Corp., Blackstone Inc., Brookfield Corp. and KKR & Co. — are reshaping the once-staid world of life insurance. Over the past decade, they’ve bought, built or partnered with insurers that sell policies and annuities, collectively commanding hundreds of billions of dollars.

In a previous era, life insurers parked their money in the safest corners of the market — mostly high-grade bonds and big-name stocks. But as Wall Street firms expanded into the business, they adopted bolder strategies to boost profits.

Many are shifting liabilities to offshore affiliates subject to less detailed disclosure requirements than in the US. Insurers and those overseas entities are also pursuing higher returns with more sophisticated and potentially less-liquid investments — such as exotic asset-backed securities and other bets tied to private credit or private equity.

Athene has become a trendsetter in other ways. It invests in deals and products from Apollo’s asset management division. It also taps cheap financing from a government-backed system designed to support home loans, which can be reinvested to amplify returns.

Its profits have set off a stampede of imitators, prompting experts — such as researchers at the Bank for International Settlements — to suggest they may be adding risks to the system.

“Athene’s top priority is policyholder protection, and we are highly secure, transparent and well-capitalized with $34 billion of regulatory capital,” the company said in a statement. “We operate in a heavily regulated industry and maintain the same policyholder benefit reserves for our Bermuda reinsurance subsidiaries as we do for our US insurance subsidiaries, where $1 billion of reserves in the US is equal to $1 billion of reserves in Bermuda.”

Rather than pool funds it gathers from pensions in its general account, Athene keeps them in a separate one.

The transformation of insurance under Wall Street firms in recent years has created a split screen:

On one side, Washington is debating whether to open private markets to ordinary savers — with President Donald Trump calling to loosen rules so that everyday Americans and their 401(k)s can invest in private credit and other non-public assets long reserved for investing professionals and the wealthy.

On the other, private equity-affiliated life insurers are already shepherding retirement savings into those same opaque markets — including for people who say they don’t want that.

For Schoen and his old co-workers it’s about risks: If Athene’s wagers ever go awry, much of the money he lives off of could be lost.

If the bets boost returns, Apollo will reap the extra profit. His monthly check won’t increase.

The group of retired steelworkers sit at chairs and folding tables, their gazes focused on something out of the frame of the image. Behind them is a calendar, a poster for an injury attorney and a memorial poster for the labor activist Fannie Sellins.

Athene alone has reached at least 49 deals with companies such as Alcoa Corp., AT&T Inc. and Lockheed Martin Corp. to convert almost $53 billion of pensions into annuities — covering about 535,000 people at the end of June. Several of those transactions are being challenged in lawsuits, crimping new deals. Athene has said it still aims to do more.

In recent weeks on Wall Street, a broad debate has erupted over the safety of credit markets after a spree of alleged frauds. That has prompted industry veterans to warn about where private credit risks may pile up, with UBS Group AG Chairman Colm Kelleher calling for more effective regulation of insurers.

Meanwhile in court, an official analyzing the Allegheny retirees’ complaint recommended rejecting it because their monthly checks are still being disbursed. The presiding judge is considering arguments from Schoen’s lawyers on why their case should continue.

In its statement, Athene brushed off the lawsuit and others like it.

“These are baseless complaints instigated by class-action attorneys who are attempting to enrich themselves at the expense of retirees,” the company said.

Schoen and his old co-workers packed into the only hearing held so far. One of them also created a Facebook group to share information after they lost access to the Allegheny office that helped them navigate their benefits.

“You got all these people who have questions,” Schoen said. “Their wives are dying or they themselves are sick. We try and help them through it because we can’t call Athene for them. Believe me, I tried.”

Private equity’s foray into life insurance is rooted in the aftermath of the 2008 financial crisis, when both sides were reeling.

Buyout firms needed fresh cash to fund deals. Insurers had just gotten bludgeoned in the markets, leaving portfolios anemic and their stocks cheap.

Apollo spotted an opportunity and in 2009 helped set up Athene, which started scooping up insurance obligations. Heads turned a year later when it reached a deal to buy Liberty Life Insurance Co., which had insurance licenses in 49 states and a $2.8 billion block of fixed annuities. Soon, Athene was one of the top providers of new annuities.

The moves upstaged Apollo’s rivals. Policymakers wrung their hands over whether to enact new rules. But watchdogs’ worries about a catastrophe subsided during the long bull market that followed. Apollo’s push into insurance fueled one of the great runs in Wall Street history. The firm’s net income last year was 27 times its 2014 profit. Its stock has returned more than 1,000% in the past decade. The strategies it honed along the way have become the industry’s playbook.

It starts with what’s called an affiliated reinsurer.

In plain terms, reinsurance is how insurance companies spread their risk. Rather than hold all the potential losses on their own books, they pay another firm that agrees to cover certain unlikely risks.

An affiliated reinsurer — sometimes called a “captive” reinsurer — takes that idea one step further. The US insurer sets up its own reinsurance company, often in a place like Bermuda, where taxes are lighter and rules looser but still well regarded by other countries. Another destination, the Cayman Islands, offers an even laxer regime.

In the end, the US insurer shifts some of its responsibilities to an entity connected to itself — seeking advantages that can be myriad and arcane, including more flexible capital requirements, alternative accounting standards and fewer disclosures.

For Athene, reinsurance has become a powerful financial lever, giving it more leeway to take on additional business in the US. But by routing policies through its own Bermuda-based reinsurer, lawyers for Schoen argue that policyholders aren’t getting the stronger backstop of a third-party reinsurer.

Many insurers also set up so-called modified co-insurance contracts with affiliated companies. Such transactions essentially let an insurer keep holding a pile of assets and reserves on its books while shifting some risk to a reinsurer, which promises to pay a share of liabilities.

Athene’s executives have vigorously defended the way Apollo has sought to improve returns in the insurance business, saying that it’s being unfairly criticized for leading a troubled industry out of a morass and to fresh capital. They note that its Bermuda-based operations also take in third-party money, adding to their strength.

“All capital coming into this industry is coming through private equity, and interestingly, Athene represents about 40% of the new capital that’s coming in,” Athene’s then-vice chairman, Bill Wheeler, told US Labor Department officials in mid-2023. “And a lot of that capital is coming in via reinsurance and via Bermuda.”

Indeed, other private equity-backed insurers have followed suit. Firms tied to KKR and Blackstone also own their offshore reinsurers, turning what started as a niche accounting strategy into a cornerstone of modern insurance.

Last year, US life and health insurers had $928 billion of reinsurance from entities in Bermuda, including modified co-insurance deals, according to data from AM Best. That’s up from $205 billion in 2014. Athene’s main US subsidiary in Iowa leads the trend with almost $200 billion — all with its own Bermuda affiliate.

The Bermuda Monetary Authority, the island’s main financial watchdog and issuer of its currency, said it has stepped up oversight of reinsurers in recent years. “Bermuda’s life market has paid $250 billion to policyholders within the last two years alone,” the BMA said in a statement, calling that an “important retirement safety net.”

When Athene started converting pensions into annuities in 2017, many companies were eager to unload those obligations. The 2008 crisis had chewed up portfolios. As markets gradually recovered, employers saw a chance to top up pension funds and hand them off, making them someone else’s headache.

Athene began by taking over $320 million of obligations for more than 10,000 retirees from an unidentified company, saying publicly that it was looking for deals of $200 million or more. Employers lined up.

“It’s a matter of how many of these transactions can you onboard at once,” Athene’s Wheeler said on a 2017 conference call. “And you know there’s a limit. I want to test that limit and see how many we can do.”

Allegheny, which changed its name to ATI in recent years and moved its headquarters to Dallas, said in a statement that when it sought to hand off its pension obligations, it hired an outside adviser that selected Athene. It declined to comment on the lawsuit filed by former employees.

“The pension annuitization is win-win for our retirees and our shareholders: By moving pension management to Athene, ATI met its obligations to retirees and made our pension contributions and expenses more predictable,” the steelmaker said. “This action put our retirees and their benefits in the hands of an industry leader in retirement benefits. Athene’s core competency is administering annuity payments.”

Jerry Schlichter, a lawyer representing retirees from Allegheny and several other companies, said the handoff sends former staff a different message: “We’re no longer going to be on the hook.”

In court, he argues that protections for retirees can be watered down if their pensions are turned into annuities — with balance sheets often invested in riskier assets, liabilities shifted to offshore entities, and — if things go wrong — payouts potentially reduced more severely.

So what’s reinsurance?

That’s because pensions and annuities are regulated very differently. Corporate pension plans in the US are monitored by multiple federal watchdogs and backed by the Pension Benefit Guaranty Corp. If a company fails, that agency is expected to make sure recipients keep getting much of their monthly benefits — potentially paying out well over $1 million to someone who lives for decades.

But when pensions are turned into annuities, the backstop is provided by state programs. If an annuity provider ever fails, most of those systems cap an individual’s payout at $250,000.

The Labor Department requires that pensions transfer only to the safest available annuity provider. The standard was prompted by hard lessons from the 1991 collapse of Executive Life Insurance Co., once one of the largest and highest-rated insurers in the country. Executive Life had invested annuity premiums and pension assets in junk bonds that failed in a market meltdown, leading to several billion dollars of damages to policyholders. A federal report found that the insurer had, for years, inflated its surplus through reinsurance transactions.

Over the past decade, insurers aiming to beat the returns offered by highly rated corporate bonds have moved in a different direction, buying more complex debt instruments.

Among life insurers with more than $10 billion of assets, Athene is at the forefront of that shift. By the end of last year, about 25% of its cash and investments were deployed into collateralized loan obligations and other asset-backed securities, up from 10% a decade earlier. The firm has stressed to investors that 97% of the asset-backed securities are investment grade.

Athene, like others, also invests in deals and products originated by its parent company’s asset management division. Apollo and Athene executives have described that as eating your own cooking.

In its statement, Athene said it maintains a “fortress balance sheet” and pointed to the investment-grade ratings awarded to its own long-term debt, including A1 — the fifth rung — by Moody’s Ratings.

In the waning days of the Biden administration, a group of top US regulators responsible for heading off financial crises gathered in Washington.

With Treasury Secretary Janet Yellen presiding, they got a private briefing on how the industry is changing rapidly and taking risks offshore. Presenters included the Treasury Department’s Federal Insurance Office, set up after the 2008 crisis to watch out for any trouble brewing in that sector.

Beyond offshoring, officials pointed out that certain insurers were borrowing to boost returns from their portfolios — tapping low-interest financing from the Federal Home Loan Bank system. No insurer borrows more from that system than Athene.

The FHLB system was created almost a century ago to help banks offer affordable mortgages and support American homeownership. Back then, many life insurers provided home loans, so they got membership. And once a company becomes an FHLB member, it stays one, even if it stops lending directly to homebuyers.

To tap financing, firms pledge certain assets as collateral, receiving cash “advances” that they can put to any use, including in investments. At midyear, Apollo reported that Athene had $21 billion in financing outstanding from the FHLB system. That’s more than any other insurer or even banks except Truist Financial Corp. and JPMorgan Chase & Co.

Seven weeks after the panel’s briefing, Trump was sworn in. His newly created Department of Government Efficiency fielded calls to disband the federal insurance regulator, ceding oversight completely to states. There’s now legislation in Congress looking to make that happen.

For the moment, the main thing standing in the way of Athene’s momentum is the slew of lawsuits by pension recipients. So far, the rulings have been mixed.

In August, about two dozen Allegheny retirees gathered inside an old union hall in Brackenridge, Pennsylvania, a block from their former mill. They said the Pledge of Allegiance then observed a moment of silence for steelworkers killed and injured at a nearby plant explosion the previous day.

Then Schoen, his voice raspy, addressed the audience, rallying them to keep up the fight to protect their retirement.

“This is just not for us, this is for every other union that’s out there that companies are going to start doing this to,” he said. “We’ve worked hard for all of this. We sacrificed for it.”

Almost a decade after a private equity firm began reshaping a struggling life insurer, authorities are grappling with a $2.2 billion shortfall. Policyholders fear life-changing losses.
When Jenny Nappo lost her husband Jimmy to a long battle with cancer, she didn’t imagine that her ordeal was just beginning.

For 17 years, the couple faithfully paid life insurance premiums so if tragedy ever struck, the stay-at-home mom would stay afloat and their daughters could afford college. The policy they bought as newlyweds promised a $2 million safety net.

But since Jimmy died at age 53, Jenny has received only $300,000 — and the collapse of her private equity-owned insurer makes it unclear whether she’ll ever see the rest.

PHL Variable Insurance Co. is a cautionary tale of what can go wrong as Wall Street firms expand into life insurance and take over obligations to American savers. Since the insurer sold policies to the Nappo family and thousands of others, it has unraveled into a shell of itself. A few weeks after Jimmy’s death, the firm’s deteriorating finances prompted a regulator in its home state of Connecticut to place it in rehabilitation and limit payouts — effectively withholding nest eggs worth at least $400 million.

Authorities have since estimated the firm faces a $2.2 billion capital shortfall.

“My husband died feeling like we had done the right thing,” Nappo said. “We did what we were supposed to do. And now suddenly, they’re not holding up their end of the bargain.”

Private equity firms such as PHL’s owner, Golden Gate Capital, have rapidly bought up a chunk of the US life insurance industry in one of Wall Street’s biggest trades of the past decade. Many are reshaping their insurers’ balance sheets — holding less capital, shifting liabilities offshore and buying more complex or potentially illiquid assets, such as private credit and asset-backed securities, that are the forte of their Wall Street owners.

This story is part of a Bloomberg series showing how those strategies have exploded in popularity — and their potential ramifications.

In PHL’s case, the saga is laid out in state court filings in Connecticut, where local insurance officials have been updating a judge for more than a year on their examination of what happened and what’s left for policyholders. Those documents present a detailed chronology of the life insurer after its acquisition by an investment firm. No one has been accused of breaking the law.

Golden Gate is known in the restaurant world for reshaping Red Lobster and selling it in 2020, three years before the chain tumbled into bankruptcy.

When the private equity firm’s new insurance arm, Nassau Financial Group, agreed to buy PHL in 2015, the life insurer was already facing a variety of challenges.

They included outside investors’ purchases of customers’ policies, which has bedeviled the industry and effectively rendered the prior management team’s actuarial assumptions obsolete.

But court documents also reveal the role that financial re-engineering played in the life insurer’s fate. The moves included setting up two “captive” reinsurers over time that together promised to cover any future shortfalls.

In 2021, Golden Gate executives handed PHL additional capital and won a state regulator’s blessing to break off the business into a standalone entity. Yet PHL’s deterioration persisted, court records show. By early 2023, authorities ramped up oversight. And last year they sought a full accounting, digging into the reinsurers to size up the shortfall.

“We remain committed to supporting the Connecticut Insurance Department in its efforts to serve PHL policyholders,” a spokesperson for Nassau said in a statement that didn’t address questions for this story. Golden Gate declined to comment.

Nappo and hundreds of others may soon learn how much of their benefits they might collect.

“I’m beyond perplexed as to how this company’s kind of woeful financial position wasn’t caught far sooner by state regulators,” said John Williams, who owns a security company in Hartford, Connecticut, and has an annuity with PHL. “It blows my mind.”

PHL has long reflected its times.

When Abraham Lincoln needed insurance, he turned to one of its earliest ancestors. The company, founded in 1851 as American Temperance Life Insurance Co., initially catered to teetotalers like the alcohol-wary president.

As the US rumbled toward Civil War, the abstinence movement faltered and the firm became Phoenix Mutual Life Insurance Co., insuring drinkers, too. When mergers swept through the industry more than a century later, Phoenix joined in. As investors snapped up insurance stocks in the early 2000s, Phoenix went public. And when a flurry of life insurers sold themselves to private equity mavens, so did Phoenix.

“I’m beyond perplexed as to how this company’s kind of woeful financial position wasn’t caught far sooner by state regulators”
The years after the 2008 financial crisis marked a nadir for many life insurers. Their portfolios lost money as the market slumped, then took another hit as the Federal Reserve tried to revive the economy with rock-bottom interest rates, crimping bond returns. As Phoenix adjusted its accounting and posted losses in 2015, the stock tumbled more than 80% in less than nine months.

That’s when Golden Gate’s Nassau pounced.

The expansion echoed what Apollo Global Management Inc. was already pursuing with its own life insurer, Athene. At that company, executives were seeking to sell more coverage, boost returns from assets and use cashflows to fund deals arranged by the firm’s Wall Street investment arm.

As part of its deal, Nassau injected $100 million of fresh capital into Phoenix, with Nassau’s chief executive officer publicly predicting that would help “accelerate the company’s turnaround, bolster its financial strength and ratings, and benefit policyholders.”

“You would’ve thought, ‘Oh my God, this company is bulletproof for the next 300 years,’ based on the way they were painting it,” said Williams, the business owner. “They were really pumping that.”

Persuaded, he rolled his other life insurance savings into an annuity at PHL, which was part of Phoenix, in 2018.

Late the next year, according to the court documents, PHL stopped selling new life policies and annuities so that it could focus on fulfilling existing obligations.

Behind the scenes, PHL’s recurring losses were dragging on Nassau, according to an analysis at the time by S&P Global Ratings.

At its core, life insurance is based on estimates. Figure out how long a group of customers will live on average, and how many of them will keep paying their policies until they die. Add up the money collected from them, invest wisely and make payouts to those who keep up with premiums until they die.

PHL’s business went wrong at every turn.

Usually, insurers catch a break if customers walk away and forfeit what they already put in. Instead, many PHL policyholders sold their policies to investors who kept paying premiums to later collect the benefits. The twist, known as “stranger-originated life insurance,” or STOLI, has stung many insurers.

Then in 2020, the pandemic shortened life expectancies.

And ultimately there was another problem, Connecticut’s insurance regulator wrote in a court filing last year: “investments that did not perform as projected.”

The long-simmering pressures on PHL were hardly secret within financial circles. S&P downgraded the insurer’s credit five notches in 2019, to CCC+ from BB, citing a $100 million decline in capital adequacy.

In the same decision, S&P also assigned a negative outlook to other Nassau companies, expressing concerns about risk management and their exposure to PHL.

Amid worries that PHL’s losses might propagate, regulators in neighboring New York intervened. The Department of Financial Services, which oversaw the Nassau entity with the most capital, prohibited it from contributing to PHL, according to an S&P note at the time. The New York agency didn’t respond to requests for comment.

In late 2019, Nassau took dramatic steps. It put PHL in run-off mode and embarked on a series of transactions that re-engineered the unit’s balance sheet — starting with buying reinsurance.

Traditionally, insurers bought reinsurance from third parties — paying outsiders to share potential burdens. But this century, a variation known as captive reinsurance has come into vogue. The idea is simple: An insurer sets up its own reinsurer and buys coverage from it to get balance-sheet relief. However, that can eliminate the outsider perspectives and checks that third-party reinsurers provide.

For PHL, executives created a new captive called Concord Re, which promised to handle any obligations that PHL and its existing reinsurers couldn’t manage, records show. That unit, in turn, shared some of its liabilities with another captive reinsurer.

Overall, PHL’s various reinsurance programs totaled almost $5.3 billion at the end of 2022. The majority — $3.5 billion — stemmed from its dealings with Concord Re.

That helped alleviate the regulatory pressure on PHL. But its capital turned negative in 2023, prompting Connecticut’s insurance regulator to place the firm under closer supervision. As the situation worsened, the firm entered a court-supervised process known as rehabilitation, which aims to salvage struggling insurers.

By May last year, Connecticut’s regulator estimated PHL and its captives faced a $900 million hole. Still, authorities said they needed more information on the reinsurers. They took a deeper look, updated actuarial assumptions, lifted a special accounting treatment and within six months presented a new estimate to the court.

That time, the estimated shortfall exceeded $2 billion.

“Hundreds of millions of dollars was moved around in a circle to give the illusion that PHL Variable was OK when it wasn’t,” said Edward Stone, a lawyer representing some policyholders in the rehabilitation, echoing arguments he has made to the court. “That’s the kind of thing that I think puts policyholders at great risk and creates systemic risk for the life and annuity business.”

PHL’s modernized investment strategy failed to head off its unraveling. Taking a page out of industry’s new playbook, PHL ultimately parked about 30% of its assets in less liquid investments — such as structured notes and other alternative products — including those issued by Nassau’s asset management arm, court filings show.

In PHL’s audited statements for 2024, some of the firm’s investments in Nassau’s collateralized loan obligations were worth a third less than their face value, with some other books down by more than half, according to the filings.

In 2018, PHL said its holding company committed to authorities that it would keep the insurer’s risk-adjusted capital ratio — a measure of financial strength — above 200% until 2023. But that agreement stopped appearing in public documentation as early as 2021, when Golden Gate made a capital contribution and moved PHL out of its stronger Nassau business, which has $25.6 billion of assets.

The pledge was important to PHL’s solvency and policyholders, who didn’t notice its disappearance, Stone said.

“Hundreds of millions of dollars was moved around in a circle to give the illusion that PHL Variable was OK when it wasn’t”
Despite requests by the Connecticut Insurance Department when the rehabilitation proceedings started, Golden Gate declined to contribute capital to help shore up PHL’s finances, according to a person with knowledge of the situation, who asked not to be identified discussing the private talks.

Connecticut Insurance Commissioner Andrew Mais said the rehabilitation proceedings seek to maximize the firm’s assets in the interest of all policyholders.

“We recognize that the moratorium has placed financial burdens on certain policyholders,” he said.

Golden Gate’s Nassau is still getting payments from PHL. Despite being in rehabilitation, PHL sends millions of dollars to the Nassau companies for administrative and asset management services. The regulator has also allowed it to pay commissions to agents who sold PHL policies so they can keep helping those customers.

Recently, PHL’s rehabilitator said it hopes to recover funds from undisclosed third parties, either through settlements or litigation. It’s also looking to sell parts of PHL, and has said it hopes to come up with a formal rehabilitation plan soon.

Meanwhile, policyholders say they’re in limbo. To avoid a “run-on-the-bank” scenario, the Connecticut regulator enforced a moratorium that capped policyholders’ benefits at $250,000 or $300,000, depending on the policies. But life insurance clients still need to make payments to keep policies alive.

That means spending more to chase a payout that’s uncertain.

One of Stone’s clients, SWS Holdings, holds two policies that were supposed to pay out $18 million. It has to fork over more than $671,000 every year in premiums to PHL.

In a recent gesture toward policyholders, Connecticut’s insurance regulator said it was working on potential adjustments to the moratorium to reduce or stop requiring future premiums for some clients, or to let others access some of their funds.

The moratorium provides exceptions, and a committee has been set up to pay claims when policyholders can prove financial hardship. The program has allowed 191 payments for a total of about $5.4 million.

But Jenny Nappo, who spent weeks working on her application for that program, received a letter saying her request was denied.

“It seemed to be sort of my last hope,” she said. “And they weren’t interested.”

 

 

 

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