WEBVTT - How Private Equity Got Its Hands on Billions in Americans’ Retirement Money

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Life insurance was not

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<v Speaker 1>a very exciting business before the financial crisis.

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<v Speaker 2>Alex Rajbondari covers the US insurance sector for Bloomberg. He

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<v Speaker 2>says that for a long time, life insurance was considered

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<v Speaker 2>one of the dullest corners of the financial world, dependable,

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<v Speaker 2>no frills, low drama. But after the financial crisis, that

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<v Speaker 2>all changed because that's when a new group of players

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<v Speaker 2>started taking an interest in the industry.

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<v Speaker 1>As soon as private equity got involved. I mean at

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<v Speaker 1>wool Street, a lot of people are working on this

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<v Speaker 1>and there's a lot of money flowing in.

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<v Speaker 2>Private equity isn't known for being low drama. They use

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<v Speaker 2>their pools of capital to take riskier bets on alternative

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<v Speaker 2>assets in the hopes of getting larger returns. And when

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<v Speaker 2>private equity firms started buying up life insurers in the

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<v Speaker 2>wake of the market crash, they had a plan to

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<v Speaker 2>transform the entities from sleepy financial backstops into money making machines. Today,

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<v Speaker 2>the subsidiaries of private equity firms manage billions of dollars

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<v Speaker 2>worth of life insurance policies and annuities and are able

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<v Speaker 2>to invest premiums and retirement savings into opaque markets.

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<v Speaker 1>The National Association of Insurance Commissioners estimates there's one hundred

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<v Speaker 1>and thirty nine insurers in the country that are owned

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<v Speaker 1>by private equity. Most of them, the vast majority of them,

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<v Speaker 1>are life insurers. That represents seven hundred billion in assets

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<v Speaker 1>just for the US. It's a fraction of the entire industry,

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<v Speaker 1>but it's definitely a significant one.

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<v Speaker 3>You can imagine people who have been in retirement, some

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<v Speaker 3>for decades, are sort of wondering what does this mean

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<v Speaker 3>and trying to find out.

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<v Speaker 2>That's Tom Schoenberg, who covers financial regulation for Bloomberg. As

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<v Speaker 2>he and Alex track private equity's growing influence in the

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<v Speaker 2>life insurance industry, they too have been trying to find

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<v Speaker 2>out what their strategy means for policy holders, retirees, and

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<v Speaker 2>the economy at large.

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<v Speaker 3>This kind of strategy adopted by most large insurers has

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<v Speaker 3>yet to be road tested in crisis. So I would

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<v Speaker 3>borrow sort of a phrase from back then, has this

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<v Speaker 3>now become too big to fail?

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<v Speaker 2>I'm Sarah Holder, and this is the big take from

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<v Speaker 2>Bloomberg News today. On the show, how private equity came

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<v Speaker 2>to control a growing share of life insurance and retirement plans,

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<v Speaker 2>and why the industry's complex strategy could expose America's retirees

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<v Speaker 2>to new risks. Back in August, Bloomberg's Tom Schoenberg took

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<v Speaker 2>a trip to Brackenridge, Pennsylvania.

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<v Speaker 3>Kind of northeast of Pittsburgh. You know, it's a Stickell

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<v Speaker 3>mill town. The mills called Allegheny Technologies. That's the company.

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<v Speaker 3>They own a number of different mess I mean, they've

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<v Speaker 3>produced everything from cannon balls for the Revolutionary War, produced

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<v Speaker 3>steel for the Chrysler building or for the Ford Model

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<v Speaker 3>a car.

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<v Speaker 2>There he met retirees like Bill Shane, who spent thirty

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<v Speaker 2>eight years at Alleghany Technologies before retiring in two thousand

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<v Speaker 2>and five.

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<v Speaker 4>I'm seventy six years old with lots of medical problems.

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<v Speaker 4>I'm not going out and get any physical job anymore.

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<v Speaker 4>I can't do that. Pension is very important to everybody

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<v Speaker 4>that works in the plant.

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<v Speaker 2>Until a couple of years ago, Shane and his other

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<v Speaker 2>former Alleghany Technologies steel worker colleagues got their pensions directly

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<v Speaker 2>from the company.

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<v Speaker 3>Depending upon when they retired, they were set with a

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<v Speaker 3>specific amount of money that they'd receive every month. If

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<v Speaker 3>they had an issue, an yet problems, spouse dies and

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<v Speaker 3>they need to access benefits, they call their former employer.

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<v Speaker 2>And so what changed.

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<v Speaker 3>It was about two years ago in the employees started

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<v Speaker 3>getting notifications in the mail that Alleghany was no longer

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<v Speaker 3>going to be in charge of their pensions, that it's

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<v Speaker 3>now going to be handled by company named Athene. You know,

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<v Speaker 3>most of these workers, they had no idea who Athene

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<v Speaker 3>was what it was.

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<v Speaker 2>Athene is a life insurance arm of Apollo Global Management,

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<v Speaker 2>a giant in alternative asset management, including private equity. When

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<v Speaker 2>Alleghany Technologies turned over its pension fund to Athene, the

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<v Speaker 2>employee's monthly pension payouts from their former employer became monthly

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<v Speaker 2>annuity payments from Athene. That rattled workers like Shane.

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<v Speaker 4>How do you just throw something out there to someone

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<v Speaker 4>who we're sending you a pension at a new How

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<v Speaker 4>do you even know what annuity was?

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<v Speaker 2>Quite frankly, annuities are a different way of saving for retirement.

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<v Speaker 2>A person or a company buys an annuity by giving

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<v Speaker 2>a big chunk of money to an insurance company. The

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<v Speaker 2>insurer invests that money and the people who hold the

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<v Speaker 2>annuities get a predictable payout over time. In all, Athene

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<v Speaker 2>has converted more than fifty billion dollars worth of pension

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<v Speaker 2>funds into annuities, including one and a half billion dollars

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<v Speaker 2>worth of Allegheny Technologies pensions. Those workers' retirement savings are

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<v Speaker 2>added to a giant pot of money that's managed by

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<v Speaker 2>a theme. It's a model that Bloomberg's Alex Rojbondari says

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<v Speaker 2>has become the industry standard.

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<v Speaker 1>Apollo is the first one to have really done it

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<v Speaker 1>in the US. Is basically using Athene and its capital

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<v Speaker 1>money that policyholders put in the company for their safety

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<v Speaker 1>in the future, use that to invest in products that

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<v Speaker 1>are originated by Apollo.

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<v Speaker 2>Those products can be asset backed securities, they can be

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<v Speaker 2>loans to companies that Apollo owns, or other investment vehicles

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<v Speaker 2>tied to private credit.

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<v Speaker 1>Those products yield more, so the narrative behind this is

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<v Speaker 1>that allows THEEN to be more profitable. What worries people

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<v Speaker 1>and pensioneers is that the THEENE has a tendency to

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<v Speaker 1>invest in private products that yield more, and those products

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<v Speaker 1>there's a lot of question marks around them today.

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<v Speaker 2>Great, I mean you hear that private equity investments are

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<v Speaker 2>higher risk, but they're also higher reward potentially. I'm wondering

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<v Speaker 2>how private equity management of these retirement savings affect people's

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<v Speaker 2>monthly payments. Like if a private equity firm or Life

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<v Speaker 2>Mature manages the pension fund really really well, do pensioners

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<v Speaker 2>share in the profits.

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<v Speaker 1>No, they don't, so the techs are supposed to remain

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<v Speaker 1>the same. The difference is in the backstop if a

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<v Speaker 1>pension fund or an insurance company fails. When a pension

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<v Speaker 1>fund fails, there is a federal fund that takes over

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<v Speaker 1>the payments to policyholders.

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<v Speaker 2>Insurance, on the other hand, is regulated on a state

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<v Speaker 2>by state basis, which means the annuities they issue are

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<v Speaker 2>too so each state.

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<v Speaker 1>As their own rules as to how insolvency is dealt with,

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<v Speaker 1>and there's usually what we call the guarantee Association that

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<v Speaker 1>will take over the policies, but there's a limit to that.

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<v Speaker 1>It's typically two hundred and fifty thousand dollars for a policy.

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<v Speaker 2>So in other words, these retirees are not benefiting from

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<v Speaker 2>the potential of higher rewards, and in some cases they're

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<v Speaker 2>not protected from the potential of higher risks correct.

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<v Speaker 3>Essentially, when a pension moves from a company to an ensure,

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<v Speaker 3>it's called a pension risk transfer. It takes those pensions

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<v Speaker 3>out of a federally protected system and sort of puts

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<v Speaker 3>it into markets which are overseen predominantly by the states

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<v Speaker 3>and state regulatory systems.

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<v Speaker 2>And that's what concerns people like the former Allegheny Technologies

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<v Speaker 2>steal work Bill Shane Well worries me is.

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<v Speaker 4>In the state of the economy and the affairs that

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<v Speaker 4>are going on or in the country now that if

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<v Speaker 4>this company goes under, I'm screwed.

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<v Speaker 2>Life insurance companies typically hedge their own risks and by extension,

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<v Speaker 2>the risks of policyholders by buying something called reinsurance.

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<v Speaker 1>Reinsurance in plain terms, is insurance for insurers. So a

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<v Speaker 1>company that's taking risk for its policy holders will decide

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<v Speaker 1>to shift some of that risk to another company.

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<v Speaker 2>But in this case, Athene's reinsure is also owned by Athene.

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<v Speaker 1>What Athene did is set up that reinsurre in Bermuda.

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<v Speaker 1>Bermuda is a worldwide marketplace for reinsurance. The idea and

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<v Speaker 1>the narrative for Athene is that they go there to

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<v Speaker 1>seek third party capital to take on that risk. And

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<v Speaker 1>that's true. The marketplace is so big in Bermuda, even

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<v Speaker 1>if it's a very tiny island in the middle of

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<v Speaker 1>the Atlantic Ocean, there is a lot of capital flowing

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<v Speaker 1>in to take that risk in that place. The problem

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<v Speaker 1>is Bermuda regulations are a bit softer than the ones

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<v Speaker 1>in the US. There's less visibility into what insurance companies

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<v Speaker 1>in Bermuda do with their assets. There's less granularity around investments.

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<v Speaker 1>The filings are much shorter than the ones in the US.

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<v Speaker 1>This doesn't mean that they don't have to disclose anything

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<v Speaker 1>to their regulator, and the regulator in Bermuda is overseeing everything,

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<v Speaker 1>but outside of servers, including policyholders and retirees, have less

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<v Speaker 1>of a view over that. And what people are worried

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<v Speaker 1>about is because we don't know so much about how

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<v Speaker 1>it's invested in Bermuda. We don't really know how the

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<v Speaker 1>backstop is going to play and be effective in the

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<v Speaker 1>event of a crisis or a downturn.

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<v Speaker 2>What does it mean when Athene and Apollo have their

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<v Speaker 2>own essentially in house re ensure.

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<v Speaker 1>That's a great question, and in indeed, usually you go

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<v Speaker 1>to a third party company to kind of spread risks

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<v Speaker 1>to other players and get it off your balance sheet.

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<v Speaker 1>And what Athene does is get it off its US

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<v Speaker 1>balance sheet, but it remains into the Athene group, and

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<v Speaker 1>that's getting a lot of people worried.

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<v Speaker 2>We're not talking about anything illegal here, and Alex pointed

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<v Speaker 2>out that Athene has a regulatory ratio that's above four

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<v Speaker 2>hundred percent. That's a measure of how much capital and

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<v Speaker 2>insurer has to weather storms, and Athene's ratio is twice

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<v Speaker 2>the level that would trigger more regulatory scrutiny. An Athene

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<v Speaker 2>spokesperson told Bloomberg that quote, Athene's top priority is policyholder

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<v Speaker 2>protection and we are highly secure, transparent, and well capitalized

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<v Speaker 2>with thirty four billion dollars of regulatory capital. The company

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<v Speaker 2>says it maintains the same benefit reserves for its Bermuda

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<v Speaker 2>reinsurance subsidiaries as it does for its US subsidiaries. But

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<v Speaker 2>Alex says that what's raising concerns is not just Athene's

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<v Speaker 2>balance sheet, but the playbook it's created for other companies.

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<v Speaker 1>What Athene does, other insurans have been doing it throughout

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<v Speaker 1>the country, and that increases risks in the system. According

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<v Speaker 1>to many insurance experts, there's like a lot of private

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<v Speaker 1>equity owned insurers that are doing the same strategies, and

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<v Speaker 1>sometimes they're not going to Bermuda, they're going to the

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<v Speaker 1>Canon Islands, which is a bit less transparent. There are

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<v Speaker 1>other players doing the same thing but pushing the envelope

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<v Speaker 1>on other points, and that's what gets a lot of

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<v Speaker 1>people worried about the industry in general.

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<v Speaker 2>We get into those industry wide concerns where regulators stand

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<v Speaker 2>on this, and how the retired Allegheny steel workers are

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<v Speaker 2>trying to undo the Athene deal. After the break, the

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<v Speaker 2>financial crisis created the perfect conditions for private equity giants

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<v Speaker 2>to get into the life insurance business. Battered pe firms

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<v Speaker 2>needed more ways to bring in cash, and insurance providers

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<v Speaker 2>had tanking stocks and thin portfolios, making them cheap investments.

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<v Speaker 2>That's when Apollo set up a theme its own ensure

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<v Speaker 2>that could buy up other providers. Now over fifteen years later,

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<v Speaker 2>at a time when borrowing has become more expensive, Bloomberg's

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<v Speaker 2>alex Rajabondari says, the private equity industry is cash strapped again,

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<v Speaker 2>and that makes life insurance investments attractive.

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<v Speaker 1>As the wave of boomers to laid boomers that are

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<v Speaker 1>reaching the edge of retirement and seeking security for retirement.

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<v Speaker 1>We're speaking of four hundred billion dollars put into annuities

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<v Speaker 1>every year.

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<v Speaker 2>But as private equity gets more entrenched in the life

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<v Speaker 2>insurance industry and other firms continue to use Apollo's strategy

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<v Speaker 2>as their guide, the risks aren't just hypothetical. Alex talked

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<v Speaker 2>to one woman, Jenny Napo, whose family had a two

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<v Speaker 2>million dollar life insurance policy with a company called PHL

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<v Speaker 2>Variable Insurance Company. They'd paid their premiums for seventeen years,

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<v Speaker 2>but then the private equity firm that owned PHL unraveled,

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<v Speaker 2>in part because the insurer was making more payouts than

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<v Speaker 2>it projected it would have to. Regulators found the company

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<v Speaker 2>and its reinsurers faced a shortfall of more than two

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<v Speaker 2>billion dollars and told it to reduce payouts, and that

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<v Speaker 2>had consequences for policyholders. After Napo's husband died last year,

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<v Speaker 2>she didn't receive the two million dollars she expected. Instead,

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<v Speaker 2>she got three hundred thousand dollars.

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<v Speaker 1>She doesn't know she's ever going to get more. The

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<v Speaker 1>regulator in Connecticut has taken over the administration of the

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<v Speaker 1>company and is basically limiting the payouts that the company

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<v Speaker 1>can make to policy holders to shield the balance sheet

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<v Speaker 1>of the company in his financial sending.

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<v Speaker 2>The Connecticut Insurance Department, in a statement to Bloomberg, said

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<v Speaker 2>that its decision to initiate rehabilitation proceedings was quote grounded

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<v Speaker 2>in how to best maximize phl's assets and equitably administer

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<v Speaker 2>its business for the benefit of all policy holders. They

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<v Speaker 2>said they recognized the burdens it placed on policy holders

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<v Speaker 2>and that they were committed to rehabilitating the company. NASA

0:14:24.120 --> 0:14:28.160
<v Speaker 2>Financial Group, which previously owned PHL, told Bloomberg, we remain

0:14:28.240 --> 0:14:31.560
<v Speaker 2>committed to supporting the Connecticut Insurance Department in its efforts

0:14:31.560 --> 0:14:35.680
<v Speaker 2>to serve PHL policy holders. Golden Gate Capital, the private

0:14:35.720 --> 0:14:41.360
<v Speaker 2>equity owner of PHL, declined to comment. The potential for

0:14:41.400 --> 0:14:45.600
<v Speaker 2>this sort of scenario has concerned regulators for years. During

0:14:45.640 --> 0:14:50.040
<v Speaker 2>the Biden administration, regulators at the Financial Stability Oversight Council

0:14:50.120 --> 0:14:53.400
<v Speaker 2>and the Labor Department were actively talking about this kind

0:14:53.400 --> 0:14:53.840
<v Speaker 2>of risk.

0:14:54.160 --> 0:14:57.800
<v Speaker 3>They heard from everybody, including a theme, and eventually said,

0:14:57.840 --> 0:14:59.640
<v Speaker 3>and this was just about it. Little morning a year

0:14:59.680 --> 0:15:04.120
<v Speaker 3>ago said we have a lot of concerns about these arrangements,

0:15:04.160 --> 0:15:07.840
<v Speaker 3>these relationships. The lack of transparency in certain spites, but

0:15:08.960 --> 0:15:10.720
<v Speaker 3>we're not going to do anything at the moment in

0:15:10.720 --> 0:15:12.600
<v Speaker 3>this space. We're going to sort of go with the

0:15:12.600 --> 0:15:14.120
<v Speaker 3>current sort of rules that we have.

0:15:14.720 --> 0:15:18.960
<v Speaker 2>In other words, the Biden administration was concerned but didn't

0:15:18.960 --> 0:15:23.840
<v Speaker 2>take action, and now the Trump administration wants fewer regulations.

0:15:23.880 --> 0:15:27.880
<v Speaker 2>If anything. There's legislation in Congress to disband the Federal

0:15:27.920 --> 0:15:31.680
<v Speaker 2>Insurance Regulator and seed oversight to the states, and Trump

0:15:31.760 --> 0:15:34.920
<v Speaker 2>signed an executive order making it easier for Americans four

0:15:34.920 --> 0:15:40.720
<v Speaker 2>oh one ks to include alternative investments, including private assets. Meanwhile,

0:15:40.960 --> 0:15:43.800
<v Speaker 2>even as more Americans could see their life savings pulled

0:15:43.800 --> 0:15:47.840
<v Speaker 2>into the universe of private equity capital management, the Alleghany

0:15:47.880 --> 0:15:52.000
<v Speaker 2>mill workers are trying to undo the deal that impacted them.

0:15:52.400 --> 0:15:54.640
<v Speaker 2>They want to get their money out of a theme.

0:15:57.840 --> 0:16:00.160
<v Speaker 2>They've been holding meetings at an old union hall a

0:16:00.160 --> 0:16:02.280
<v Speaker 2>block from the mill where they used to work, to

0:16:02.320 --> 0:16:04.760
<v Speaker 2>share their concerns and organize.

0:16:11.560 --> 0:16:11.920
<v Speaker 4>Company.

0:16:16.320 --> 0:16:20.800
<v Speaker 3>They are suing their former company, Allegheny Technologies.

0:16:31.960 --> 0:16:35.000
<v Speaker 2>They're referring to a requirement from the Labor Department that

0:16:35.080 --> 0:16:38.360
<v Speaker 2>when companies move pensions to an annuity provider, they have

0:16:38.440 --> 0:16:41.080
<v Speaker 2>to pick the safest available annuity provider.

0:16:41.240 --> 0:16:44.600
<v Speaker 3>What they're alleging in their lawsuit is that Athene was

0:16:44.680 --> 0:16:47.840
<v Speaker 3>not the best annuity provider that could have been selected.

0:16:48.080 --> 0:16:51.480
<v Speaker 2>In a statement to Bloomberg, Athene said, quote, these are

0:16:51.560 --> 0:16:55.280
<v Speaker 2>baseless complaints instigated by class action attorneys who are attempting

0:16:55.280 --> 0:17:00.240
<v Speaker 2>to enrich themselves at the expense of retirees. Alleghany, now

0:17:00.280 --> 0:17:02.920
<v Speaker 2>known as ATI, said in a statement that when it

0:17:03.040 --> 0:17:06.199
<v Speaker 2>sought to hand off its pension obligations, it hired an

0:17:06.240 --> 0:17:09.879
<v Speaker 2>outside advisor that selected a Theene declined to comment on

0:17:09.880 --> 0:17:14.040
<v Speaker 2>the lawsuit filed by former employees. Athene statement went on

0:17:14.080 --> 0:17:17.280
<v Speaker 2>to say that converting the pensions into annuities was a

0:17:17.280 --> 0:17:22.160
<v Speaker 2>win win quote. By moving pension management to Athene, ATI

0:17:22.400 --> 0:17:26.520
<v Speaker 2>met its obligations to retirees and made our pension contributions

0:17:26.520 --> 0:17:31.040
<v Speaker 2>and expenses more predictable. Tom, what's next for the Alleghany

0:17:31.080 --> 0:17:33.880
<v Speaker 2>steel workers? Where do things stand with the lawsuit?

0:17:34.040 --> 0:17:37.919
<v Speaker 3>They had a hearing in court and that magistrate ruled

0:17:38.080 --> 0:17:41.560
<v Speaker 3>in favor of Alleghany, so against them, essentially saying that

0:17:41.640 --> 0:17:45.480
<v Speaker 3>you know that she was recommending that their lawsuit be

0:17:45.520 --> 0:17:48.440
<v Speaker 3>dismissed because they couldn't actually show that they've been harmed.

0:17:48.440 --> 0:17:50.960
<v Speaker 3>The checks keep coming, so the kind of the judge

0:17:51.000 --> 0:17:54.080
<v Speaker 3>overseeing this case is going to make a decision in

0:17:54.119 --> 0:17:57.520
<v Speaker 3>the next you know, next month or so. There's been

0:17:57.560 --> 0:18:01.399
<v Speaker 3>mixed rulings here, others like one bar by pension holders

0:18:01.400 --> 0:18:07.000
<v Speaker 3>from Lockheed, very similar case, same lawyers. A judge found

0:18:07.000 --> 0:18:10.120
<v Speaker 3>in Maryland federal judge that that case can move forward

0:18:10.240 --> 0:18:12.760
<v Speaker 3>and that's on appeal right now. So what's really what

0:18:12.880 --> 0:18:15.439
<v Speaker 3>we're seeing here is I think these things are going

0:18:15.480 --> 0:18:17.360
<v Speaker 3>to continue to be litigated.

0:18:18.560 --> 0:18:22.080
<v Speaker 2>So far, the pe industry hasn't had a major stress

0:18:22.119 --> 0:18:25.480
<v Speaker 2>test since two thousand and eight, and that's influencing how

0:18:25.520 --> 0:18:29.560
<v Speaker 2>the risk is perceived and how these cases could play out.

0:18:29.720 --> 0:18:32.080
<v Speaker 3>So we're really looking to see whether or not these

0:18:32.119 --> 0:18:37.000
<v Speaker 3>investments in private markets, in private credit, asset backed securities,

0:18:37.000 --> 0:18:40.879
<v Speaker 3>holateralized debt obligations, if something goes bad in one place,

0:18:41.320 --> 0:18:43.840
<v Speaker 3>whether it's going to have sort of a domino effect

0:18:44.280 --> 0:18:48.320
<v Speaker 3>throughout not just the insurance system, but the overall the

0:18:48.400 --> 0:18:55.639
<v Speaker 3>larger financial markets.

0:18:56.840 --> 0:18:59.840
<v Speaker 2>This is the Big Take from Bloomberg News. I'm Sarah Holder.

0:19:00.480 --> 0:19:03.000
<v Speaker 2>To get more from the Big Take and unlimited access

0:19:03.080 --> 0:19:06.840
<v Speaker 2>to all of Bloomberg dot com, subscribe today at bloomberg

0:19:06.880 --> 0:19:10.640
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0:19:10.800 --> 0:19:12.959
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0:19:12.960 --> 0:19:15.600
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0:19:16.600 --> 0:19:18.800
<v Speaker 2>Thanks for listening. We'll be back tomorrow