Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Life insurance was not
Speaker 1: a very exciting business before the financial crisis.
Speaker 2: Alex Rajbondari covers the US insurance sector for Bloomberg. He
Speaker 2: says that for a long time, life insurance was considered
Speaker 2: one of the dullest corners of the financial world, dependable,
Speaker 2: no frills, low drama. But after the financial crisis, that
Speaker 2: all changed because that's when a new group of players
Speaker 2: started taking an interest in the industry.
Speaker 1: As soon as private equity got involved. I mean at
Speaker 1: wool Street, a lot of people are working on this
Speaker 1: and there's a lot of money flowing in.
Speaker 2: Private equity isn't known for being low drama. They use
Speaker 2: their pools of capital to take riskier bets on alternative
Speaker 2: assets in the hopes of getting larger returns. And when
Speaker 2: private equity firms started buying up life insurers in the
Speaker 2: wake of the market crash, they had a plan to
Speaker 2: transform the entities from sleepy financial backstops into money making machines. Today,
Speaker 2: the subsidiaries of private equity firms manage billions of dollars
Speaker 2: worth of life insurance policies and annuities and are able
Speaker 2: to invest premiums and retirement savings into opaque markets.
Speaker 1: The National Association of Insurance Commissioners estimates there's one hundred
Speaker 1: and thirty nine insurers in the country that are owned
Speaker 1: by private equity. Most of them, the vast majority of them,
Speaker 1: are life insurers. That represents seven hundred billion in assets
Speaker 1: just for the US. It's a fraction of the entire industry,
Speaker 1: but it's definitely a significant one.
Speaker 3: You can imagine people who have been in retirement, some
Speaker 3: for decades, are sort of wondering what does this mean
Speaker 3: and trying to find out.
Speaker 2: That's Tom Schoenberg, who covers financial regulation for Bloomberg. As
Speaker 2: he and Alex track private equity's growing influence in the
Speaker 2: life insurance industry, they too have been trying to find
Speaker 2: out what their strategy means for policy holders, retirees, and
Speaker 2: the economy at large.
Speaker 3: This kind of strategy adopted by most large insurers has
Speaker 3: yet to be road tested in crisis. So I would
Speaker 3: borrow sort of a phrase from back then, has this
Speaker 3: now become too big to fail?
Speaker 2: I'm Sarah Holder, and this is the big take from
Speaker 2: Bloomberg News today. On the show, how private equity came
Speaker 2: to control a growing share of life insurance and retirement plans,
Speaker 2: and why the industry's complex strategy could expose America's retirees
Speaker 2: to new risks. Back in August, Bloomberg's Tom Schoenberg took
Speaker 2: a trip to Brackenridge, Pennsylvania.
Speaker 3: Kind of northeast of Pittsburgh. You know, it's a Stickell
Speaker 3: mill town. The mills called Allegheny Technologies. That's the company.
Speaker 3: They own a number of different mess I mean, they've
Speaker 3: produced everything from cannon balls for the Revolutionary War, produced
Speaker 3: steel for the Chrysler building or for the Ford Model
Speaker 3: a car.
Speaker 2: There he met retirees like Bill Shane, who spent thirty
Speaker 2: eight years at Alleghany Technologies before retiring in two thousand
Speaker 2: and five.
Speaker 4: I'm seventy six years old with lots of medical problems.
Speaker 4: I'm not going out and get any physical job anymore.
Speaker 4: I can't do that. Pension is very important to everybody
Speaker 4: that works in the plant.
Speaker 2: Until a couple of years ago, Shane and his other
Speaker 2: former Alleghany Technologies steel worker colleagues got their pensions directly
Speaker 2: from the company.
Speaker 3: Depending upon when they retired, they were set with a
Speaker 3: specific amount of money that they'd receive every month. If
Speaker 3: they had an issue, an yet problems, spouse dies and
Speaker 3: they need to access benefits, they call their former employer.
Speaker 2: And so what changed.
Speaker 3: It was about two years ago in the employees started
Speaker 3: getting notifications in the mail that Alleghany was no longer
Speaker 3: going to be in charge of their pensions, that it's
Speaker 3: now going to be handled by company named Athene. You know,
Speaker 3: most of these workers, they had no idea who Athene
Speaker 3: was what it was.
Speaker 2: Athene is a life insurance arm of Apollo Global Management,
Speaker 2: a giant in alternative asset management, including private equity. When
Speaker 2: Alleghany Technologies turned over its pension fund to Athene, the
Speaker 2: employee's monthly pension payouts from their former employer became monthly
Speaker 2: annuity payments from Athene. That rattled workers like Shane.
Speaker 4: How do you just throw something out there to someone
Speaker 4: who we're sending you a pension at a new How
Speaker 4: do you even know what annuity was?
Speaker 2: Quite frankly, annuities are a different way of saving for retirement.
Speaker 2: A person or a company buys an annuity by giving
Speaker 2: a big chunk of money to an insurance company. The
Speaker 2: insurer invests that money and the people who hold the
Speaker 2: annuities get a predictable payout over time. In all, Athene
Speaker 2: has converted more than fifty billion dollars worth of pension
Speaker 2: funds into annuities, including one and a half billion dollars
Speaker 2: worth of Allegheny Technologies pensions. Those workers' retirement savings are
Speaker 2: added to a giant pot of money that's managed by
Speaker 2: a theme. It's a model that Bloomberg's Alex Rojbondari says
Speaker 2: has become the industry standard.
Speaker 1: Apollo is the first one to have really done it
Speaker 1: in the US. Is basically using Athene and its capital
Speaker 1: money that policyholders put in the company for their safety
Speaker 1: in the future, use that to invest in products that
Speaker 1: are originated by Apollo.
Speaker 2: Those products can be asset backed securities, they can be
Speaker 2: loans to companies that Apollo owns, or other investment vehicles
Speaker 2: tied to private credit.
Speaker 1: Those products yield more, so the narrative behind this is
Speaker 1: that allows THEEN to be more profitable. What worries people
Speaker 1: and pensioneers is that the THEENE has a tendency to
Speaker 1: invest in private products that yield more, and those products
Speaker 1: there's a lot of question marks around them today.
Speaker 2: Great, I mean you hear that private equity investments are
Speaker 2: higher risk, but they're also higher reward potentially. I'm wondering
Speaker 2: how private equity management of these retirement savings affect people's
Speaker 2: monthly payments. Like if a private equity firm or Life
Speaker 2: Mature manages the pension fund really really well, do pensioners
Speaker 2: share in the profits.
Speaker 1: No, they don't, so the techs are supposed to remain
Speaker 1: the same. The difference is in the backstop if a
Speaker 1: pension fund or an insurance company fails. When a pension
Speaker 1: fund fails, there is a federal fund that takes over
Speaker 1: the payments to policyholders.
Speaker 2: Insurance, on the other hand, is regulated on a state
Speaker 2: by state basis, which means the annuities they issue are
Speaker 2: too so each state.
Speaker 1: As their own rules as to how insolvency is dealt with,
Speaker 1: and there's usually what we call the guarantee Association that
Speaker 1: will take over the policies, but there's a limit to that.
Speaker 1: It's typically two hundred and fifty thousand dollars for a policy.
Speaker 2: So in other words, these retirees are not benefiting from
Speaker 2: the potential of higher rewards, and in some cases they're
Speaker 2: not protected from the potential of higher risks correct.
Speaker 3: Essentially, when a pension moves from a company to an ensure,
Speaker 3: it's called a pension risk transfer. It takes those pensions
Speaker 3: out of a federally protected system and sort of puts
Speaker 3: it into markets which are overseen predominantly by the states
Speaker 3: and state regulatory systems.
Speaker 2: And that's what concerns people like the former Allegheny Technologies
Speaker 2: steal work Bill Shane Well worries me is.
Speaker 4: In the state of the economy and the affairs that
Speaker 4: are going on or in the country now that if
Speaker 4: this company goes under, I'm screwed.
Speaker 2: Life insurance companies typically hedge their own risks and by extension,
Speaker 2: the risks of policyholders by buying something called reinsurance.
Speaker 1: Reinsurance in plain terms, is insurance for insurers. So a
Speaker 1: company that's taking risk for its policy holders will decide
Speaker 1: to shift some of that risk to another company.
Speaker 2: But in this case, Athene's reinsure is also owned by Athene.
Speaker 1: What Athene did is set up that reinsurre in Bermuda.
Speaker 1: Bermuda is a worldwide marketplace for reinsurance. The idea and
Speaker 1: the narrative for Athene is that they go there to
Speaker 1: seek third party capital to take on that risk. And
Speaker 1: that's true. The marketplace is so big in Bermuda, even
Speaker 1: if it's a very tiny island in the middle of
Speaker 1: the Atlantic Ocean, there is a lot of capital flowing
Speaker 1: in to take that risk in that place. The problem
Speaker 1: is Bermuda regulations are a bit softer than the ones
Speaker 1: in the US. There's less visibility into what insurance companies
Speaker 1: in Bermuda do with their assets. There's less granularity around investments.
Speaker 1: The filings are much shorter than the ones in the US.
Speaker 1: This doesn't mean that they don't have to disclose anything
Speaker 1: to their regulator, and the regulator in Bermuda is overseeing everything,
Speaker 1: but outside of servers, including policyholders and retirees, have less
Speaker 1: of a view over that. And what people are worried
Speaker 1: about is because we don't know so much about how
Speaker 1: it's invested in Bermuda. We don't really know how the
Speaker 1: backstop is going to play and be effective in the
Speaker 1: event of a crisis or a downturn.
Speaker 2: What does it mean when Athene and Apollo have their
Speaker 2: own essentially in house re ensure.
Speaker 1: That's a great question, and in indeed, usually you go
Speaker 1: to a third party company to kind of spread risks
Speaker 1: to other players and get it off your balance sheet.
Speaker 1: And what Athene does is get it off its US
Speaker 1: balance sheet, but it remains into the Athene group, and
Speaker 1: that's getting a lot of people worried.
Speaker 2: We're not talking about anything illegal here, and Alex pointed
Speaker 2: out that Athene has a regulatory ratio that's above four
Speaker 2: hundred percent. That's a measure of how much capital and
Speaker 2: insurer has to weather storms, and Athene's ratio is twice
Speaker 2: the level that would trigger more regulatory scrutiny. An Athene
Speaker 2: spokesperson told Bloomberg that quote, Athene's top priority is policyholder
Speaker 2: protection and we are highly secure, transparent, and well capitalized
Speaker 2: with thirty four billion dollars of regulatory capital. The company
Speaker 2: says it maintains the same benefit reserves for its Bermuda
Speaker 2: reinsurance subsidiaries as it does for its US subsidiaries. But
Speaker 2: Alex says that what's raising concerns is not just Athene's
Speaker 2: balance sheet, but the playbook it's created for other companies.
Speaker 1: What Athene does, other insurans have been doing it throughout
Speaker 1: the country, and that increases risks in the system. According
Speaker 1: to many insurance experts, there's like a lot of private
Speaker 1: equity owned insurers that are doing the same strategies, and
Speaker 1: sometimes they're not going to Bermuda, they're going to the
Speaker 1: Canon Islands, which is a bit less transparent. There are
Speaker 1: other players doing the same thing but pushing the envelope
Speaker 1: on other points, and that's what gets a lot of
Speaker 1: people worried about the industry in general.
Speaker 2: We get into those industry wide concerns where regulators stand
Speaker 2: on this, and how the retired Allegheny steel workers are
Speaker 2: trying to undo the Athene deal. After the break, the
Speaker 2: financial crisis created the perfect conditions for private equity giants
Speaker 2: to get into the life insurance business. Battered pe firms
Speaker 2: needed more ways to bring in cash, and insurance providers
Speaker 2: had tanking stocks and thin portfolios, making them cheap investments.
Speaker 2: That's when Apollo set up a theme its own ensure
Speaker 2: that could buy up other providers. Now over fifteen years later,
Speaker 2: at a time when borrowing has become more expensive, Bloomberg's
Speaker 2: alex Rajabondari says, the private equity industry is cash strapped again,
Speaker 2: and that makes life insurance investments attractive.
Speaker 1: As the wave of boomers to laid boomers that are
Speaker 1: reaching the edge of retirement and seeking security for retirement.
Speaker 1: We're speaking of four hundred billion dollars put into annuities
Speaker 1: every year.
Speaker 2: But as private equity gets more entrenched in the life
Speaker 2: insurance industry and other firms continue to use Apollo's strategy
Speaker 2: as their guide, the risks aren't just hypothetical. Alex talked
Speaker 2: to one woman, Jenny Napo, whose family had a two
Speaker 2: million dollar life insurance policy with a company called PHL
Speaker 2: Variable Insurance Company. They'd paid their premiums for seventeen years,
Speaker 2: but then the private equity firm that owned PHL unraveled,
Speaker 2: in part because the insurer was making more payouts than
Speaker 2: it projected it would have to. Regulators found the company
Speaker 2: and its reinsurers faced a shortfall of more than two
Speaker 2: billion dollars and told it to reduce payouts, and that
Speaker 2: had consequences for policyholders. After Napo's husband died last year,
Speaker 2: she didn't receive the two million dollars she expected. Instead,
Speaker 2: she got three hundred thousand dollars.
Speaker 1: She doesn't know she's ever going to get more. The
Speaker 1: regulator in Connecticut has taken over the administration of the
Speaker 1: company and is basically limiting the payouts that the company
Speaker 1: can make to policy holders to shield the balance sheet
Speaker 1: of the company in his financial sending.
Speaker 2: The Connecticut Insurance Department, in a statement to Bloomberg, said
Speaker 2: that its decision to initiate rehabilitation proceedings was quote grounded
Speaker 2: in how to best maximize phl's assets and equitably administer
Speaker 2: its business for the benefit of all policy holders. They
Speaker 2: said they recognized the burdens it placed on policy holders
Speaker 2: and that they were committed to rehabilitating the company. NASA
Speaker 2: Financial Group, which previously owned PHL, told Bloomberg, we remain
Speaker 2: committed to supporting the Connecticut Insurance Department in its efforts
Speaker 2: to serve PHL policy holders. Golden Gate Capital, the private
Speaker 2: equity owner of PHL, declined to comment. The potential for
Speaker 2: this sort of scenario has concerned regulators for years. During
Speaker 2: the Biden administration, regulators at the Financial Stability Oversight Council
Speaker 2: and the Labor Department were actively talking about this kind
Speaker 2: of risk.
Speaker 3: They heard from everybody, including a theme, and eventually said,
Speaker 3: and this was just about it. Little morning a year
Speaker 3: ago said we have a lot of concerns about these arrangements,
Speaker 3: these relationships. The lack of transparency in certain spites, but
Speaker 3: we're not going to do anything at the moment in
Speaker 3: this space. We're going to sort of go with the
Speaker 3: current sort of rules that we have.
Speaker 2: In other words, the Biden administration was concerned but didn't
Speaker 2: take action, and now the Trump administration wants fewer regulations.
Speaker 2: If anything. There's legislation in Congress to disband the Federal
Speaker 2: Insurance Regulator and seed oversight to the states, and Trump
Speaker 2: signed an executive order making it easier for Americans four
Speaker 2: oh one ks to include alternative investments, including private assets. Meanwhile,
Speaker 2: even as more Americans could see their life savings pulled
Speaker 2: into the universe of private equity capital management, the Alleghany
Speaker 2: mill workers are trying to undo the deal that impacted them.
Speaker 2: They want to get their money out of a theme.
Speaker 2: They've been holding meetings at an old union hall a
Speaker 2: block from the mill where they used to work, to
Speaker 2: share their concerns and organize.
Speaker 4: Company.
Speaker 3: They are suing their former company, Allegheny Technologies.
Speaker 2: They're referring to a requirement from the Labor Department that
Speaker 2: when companies move pensions to an annuity provider, they have
Speaker 2: to pick the safest available annuity provider.
Speaker 3: What they're alleging in their lawsuit is that Athene was
Speaker 3: not the best annuity provider that could have been selected.
Speaker 2: In a statement to Bloomberg, Athene said, quote, these are
Speaker 2: baseless complaints instigated by class action attorneys who are attempting
Speaker 2: to enrich themselves at the expense of retirees. Alleghany, now
Speaker 2: known as ATI, said in a statement that when it
Speaker 2: sought to hand off its pension obligations, it hired an
Speaker 2: outside advisor that selected a Theene declined to comment on
Speaker 2: the lawsuit filed by former employees. Athene statement went on
Speaker 2: to say that converting the pensions into annuities was a
Speaker 2: win win quote. By moving pension management to Athene, ATI
Speaker 2: met its obligations to retirees and made our pension contributions
Speaker 2: and expenses more predictable. Tom, what's next for the Alleghany
Speaker 2: steel workers? Where do things stand with the lawsuit?
Speaker 3: They had a hearing in court and that magistrate ruled
Speaker 3: in favor of Alleghany, so against them, essentially saying that
Speaker 3: you know that she was recommending that their lawsuit be
Speaker 3: dismissed because they couldn't actually show that they've been harmed.
Speaker 3: The checks keep coming, so the kind of the judge
Speaker 3: overseeing this case is going to make a decision in
Speaker 3: the next you know, next month or so. There's been
Speaker 3: mixed rulings here, others like one bar by pension holders
Speaker 3: from Lockheed, very similar case, same lawyers. A judge found
Speaker 3: in Maryland federal judge that that case can move forward
Speaker 3: and that's on appeal right now. So what's really what
Speaker 3: we're seeing here is I think these things are going
Speaker 3: to continue to be litigated.
Speaker 2: So far, the pe industry hasn't had a major stress
Speaker 2: test since two thousand and eight, and that's influencing how
Speaker 2: the risk is perceived and how these cases could play out.
Speaker 3: So we're really looking to see whether or not these
Speaker 3: investments in private markets, in private credit, asset backed securities,
Speaker 3: holateralized debt obligations, if something goes bad in one place,
Speaker 3: whether it's going to have sort of a domino effect
Speaker 3: throughout not just the insurance system, but the overall the
Speaker 3: larger financial markets.
Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.
Speaker 2: To get more from the Big Take and unlimited access
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