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

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. Life insurance was not a very exciting business before the financial crisis. Alex Rajbandari covers the U.S. insurance sector for Bloomberg. He says that for a long time, life insurance was considered one of the dullest corners of the financial world. Dependable. No frills. Low drama. But after the financial crisis, that all changed. Because that's when a new group of players started taking an interest in the industry. As soon as private equity got involved, I mean, at Wall Street, a lot of people are working on this and there's a lot of money flowing in.

1:44Private equity isn't known for being low drama. They use their pools of capital to take riskier bets on alternative assets in the hopes of getting larger returns. And when private equity firms started buying up life insurers in the wake of the market crash, they had a plan to transform the entities from sleepy financial backstops into money-making machines. Today, the subsidiaries of private equity firms manage billions of dollars worth of life insurance policies and annuities and are able to invest premiums and retirement savings into opaque markets. The National Association of Insurance Commissioners estimates there's 139 insurers in the country that are owned by private equity.

2:28Most of them, the vast majority of them, are life insurers. That represents$700 billion in assets just for the U.S. It's a fraction of the entire industry, but it's definitely a significant one. You can imagine people who have been in retirement, some for decades, are sort of wondering, wait, what does this mean? and trying to find out. That's Tom Schoenberg, who covers financial regulation for Bloomberg. As he and Alex track private equity's growing influence in the life insurance industry, they too have been trying to find out what their strategy means for policyholders, retirees, and the economy at large.

3:10This kind of strategy adopted by most large insurers has yet to be road-tested in crisis. So I would borrow sort of a phrase from back then, has this now become too big to fail?

3:25I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, how private equity came to control a growing share of life insurance and retirement plans, and why the industry's complex strategy could expose America's retirees to new risks.

3:46Back in August, Bloomberg's Tom Schoenberg took a trip to Brackenridge, Pennsylvania. Kind of northeast of Pittsburgh. You know, it's a steel mill town. The mill's called Allegheny Technologies. That's the company. They own a number of different mills. I mean, they've produced everything from, you know, cannonballs for the Revolutionary War, produced steel for the Chrysler building or for the Ford Model A car. There, he met retirees like Bill Shane, who spent 38 years at Allegheny Technologies before retiring in 2005. I'm 76 years old with lots of medical problems. I'm not going out and get any physical job anymore.

4:26I can't do that. Pension's very important to everybody that works in the plant. Until a couple of years ago, Shane and his other former Allegheny Technologies steelworker colleagues got their pensions directly from the company. Depending upon when they retired, they were set with a specific amount of money that they'd receive every month. If they had an issue and had problems, spouse dies and they need to access benefits, they'd call their former employer. And so what changed? It was about two years ago and the employees started getting notifications in the mail that Allegheny was no longer going to be in charge of their pensions, that it's now going to be handled by a company named Athene.

5:09You know, most of these workers, they had no idea who Athene was, what it was. Athene is a life insurance arm of Apollo Global Management, a giant in alternative asset management, including private equity. When Allegheny Technologies turned over its pension fund to Athene, the employees' monthly pension payouts from their former employer became monthly annuity payments from Athene. That rattled workers like Shane. How do you just throw something out there to someone? We're sending you a pension and annuity. I don't even know what annuity was, quite frankly. Annuities are a different way of saving for retirement.

5:51A person or a company buys an annuity by giving a big chunk of money to an insurance company. The insurer invests that money, and the people who hold the annuities get a predictable payout over time. In all, Athene has converted more than$50 billion worth of pension funds into annuities, including$1.5 billion worth of Allegheny Technologies pensions. Those workers' retirement savings are added to a giant pot of money that's managed by Athene. It's a model that Bloomberg's Alex Rajbandari says has become the industry standard. Apollo is the first one to have really done it in the U.S. It's basically using Athene and its capital money that policyholders put in the company for their safety in the future.

6:40Use that to invest in products that are originated by Apollo. Those products can be asset-backed securities. They can be loans to companies that Apollo owns or other investment vehicles tied to private credit. Those products yield more. So the narrative behind this is that allows Athene to be more profitable. What worries people and pensioners is that Athene has a tendency to invest in private products that yield more. And those products, there's a lot of question marks around them today. Right. I mean, you hear that private equity investments are higher risk, but they're also higher reward potentially.

7:26I'm wondering how private equity management of these retirement savings affect people's monthly payments. Like if a private equity firm or life insurer manages the pension fund really, really well, do pensioners share in the profits? No, they don't. So the checks are supposed to remain the same. The difference is in the backstop if a pension fund or an insurance company fails. When a pension fund fails, there is a federal fund that takes over the payments to policyholders. Insurance, on the other hand, is regulated on a state-by-state basis, which means the annuities they issue are two. So each state has their own rules as to how a solvency is dealt with.

8:12And there's usually what we call the guarantee association that will take over the policies. But there's a limit to that. It's typically$250 ,000 per policy. So in other words, these retirees are not benefiting from the potential of higher rewards. And in some cases, they're not protected from the potential of higher risks. Correct. Essentially, when a pension moves from a company to an insurer, it's called a pension risk transfer. It takes those pensions out of a federally protected system and sort of puts it into markets which are overseen predominantly by the states and state regulatory systems.

8:56And that's what concerns people like the former Allegheny Technologies steelworker, Bill Shane. What worries me is the state of the economy and the affairs that are going on in the country now that if this company goes under, I'm screwed. Life insurance companies typically hedge their own risks, and by extension, the risks of policyholders, by buying something called reinsurance. Reinsurance in plain terms is insurance for insurers. So a company that's taking risk for its policyholders will decide to shift some of that risk to another company. But in this case, Athene's reinsurer is also owned by Athene.

9:38What Athene did is set up that reinsurer in Bermuda. Bermuda is a worldwide marketplace for reinsurance. The idea and the narrative for Athene is that they go there to seek third-party capital to take on that risk. And that's true. The marketplace is so big in Bermuda, even if it's a very tiny island in the middle of the Atlantic Ocean. There is a lot of capital flowing in to take that risk in that place. The problem is Bermuda regulations are a bit softer than the ones in the U.S. there's less visibility into what insurance companies in Bermuda do with their assets. There's less granularity around investments.

10:21The filings are much shorter than the ones in the US. This doesn't mean that they don't have to disclose anything to their regulator. And the regulator in Bermuda is overseeing everything. But outside observers, including policyholders and retirees, have less of a view over that. And what people are worried about is because we don't know so much about how it's invested in Bermuda, we don't really know how the backstop is going to play and be effective in the event of a crisis or a downturn. What does it mean when Athene and Apollo have their own essentially in-house reinsure? That's a great question.

10:59And indeed, usually you go to a third-party company to kind of spread risks to other players and get it off your balance sheet. And what Athene does is get it off its U.S. balance sheet, but it remains into the Athene group. And that's getting a lot of people worried. We're not talking about anything illegal here. And Alex pointed out that Athene has a regulatory ratio that's above 400 percent. That's a measure of how much capital an insurer has to weather storms. And Athene's ratio is twice the level that would trigger more regulatory scrutiny. An Athene spokesperson told Bloomberg that, quote,

11:45The company says it maintains the same benefit reserves for its Bermuda reinsurance subsidiaries as it does for its U.S. subsidiaries. But Alec says that what's raising concerns is not just Athene's balance sheet, but the playbook it's created for other companies. What Athene does, other insurers have been doing it throughout the country, and that increases risks in the system. According to many insurance experts, there's like a lot of private equity-owned insurers that are doing the same strategies, and sometimes they're not going to Bermuda, they're going to the Cayman Islands, which is a bit less transparent.

12:23There are other players doing the same thing, but pushing the envelope on other points, and that's what gets a lot of people worried about the industry in general. We get into those industry-wide concerns, where regulators stand on this, and how the retired Allegheny steelworkers are trying to undo the Athene deal after the break.

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13:56The financial crisis created the perfect conditions for private equity giants to get into the life insurance business. Battered P.E. firms needed more ways to bring in cash. And insurance providers had tanking stocks and thin portfolios, making them cheap investments. That's when Apollo set up a theme, its own insurer that could buy up other providers. Now, over 15 years later, at a time when borrowing has become more expensive, Bloomberg's Alex Rajbandari says the private equity industry is cash-strapped again. And that makes life insurance investments attractive. It's also the wave of boomers to late boomers that are reaching the age of retirement and seeking security for retirement.

14:43We're speaking of$400 billion put into annuities every year. But as private equity gets more entrenched in the life insurance industry and other firms continue to use Apollo's strategy as their guide, the risks aren't just hypothetical. Alex talked to one woman, Jenny Napo, whose family had a$2 million life insurance policy with a company called PHL Variable Insurance Company. They'd paid their premiums for 17 years. But then, the private equity firm that owned PHL unraveled, in part because the insurer was making more payouts than it projected it would have to. Regulators found the company and its reinsurers faced a shortfall of more than$2 billion and told it to reduce payouts.

15:31And that had consequences for policyholders. After Napo's husband died last year, she didn't receive the$2 million she expected. Instead, she got$300 ,000. She doesn't know she's ever going to get more. The regulator in Connecticut has taken over the administration of the company and is basically limiting the payouts that the company can make to policyholders to shield the balance sheet of the company and its financial standing. The Connecticut Insurance Department, in a statement to Bloomberg, said that its decision to initiate rehabilitation proceedings was, quote, grounded in how to best maximize PHL's assets and equitably administer its business for the benefit of all policyholders.

16:16They said they recognized the burdens it placed on policyholders and that they were committed to rehabilitating the company. Nassau Financial Group, which previously owned PHL, told Bloomberg, we remain committed to supporting the Connecticut Insurance Department in its efforts to serve PHL policyholders. Golden Gate Capital, the private equity owner of PHL, declined to comment. The potential for this sort of scenario has concerned regulators for years. During the Biden administration, regulators at the Financial Stability Oversight Council and the Labor Department were actively talking about this kind of risk.

16:54They heard from everybody, including Athene, and eventually said, and this was just about a little more than a year ago, said, we have a lot of concerns about these arrangements, these relationships, the lack of transparency in certain sites. but we're not going to do anything at the moment in this space. We're going to sort of go with the current sort of rules that we have. In other words, the Biden administration was concerned but didn't take action. And now the Trump administration wants fewer regulations, if anything. There's legislation in Congress to disband the federal insurance regulator and cede oversight to the states.

17:31And Trump signed an executive order making it easier for Americans' 401ks to include alternative investments, including private assets. Meanwhile, even as more Americans could see their life savings pulled into the universe of private equity capital management, the Allegheny mill workers are trying to undo the deal that impacted them. They want to get their money out of a theme. They've been holding meetings at an old union hall a block from the mill where they used to work to share their concerns and organize. It's not for us. This is for every other union that's out there that companies are going to start doing this to, is selling off their pensions.

18:16They are suing their former company, Allegheny Technologies. They're fiduciary responsibility to us to give us the best that they can get us, not some third-class place out of Bermuda or someone else. They're referring to a requirement from the Labor Department that when companies move pensions to an annuity provider, they have to pick the safest available annuity provider. What they're alleging in their lawsuit is that Athene was not the best annuity provider that could have been selected. In a statement to Bloomberg, Athene said, quote, These are baseless complaints instigated by class action attorneys who are attempting to enrich themselves at the expense of retirees.

18:59Allegheny, now known as ATI, said in a statement that when it sought to hand off its pension obligations, it hired an outside advisor that selected Athene. It declined to comment on the lawsuit filed by former employees. Athene's statement went on to say that converting the pensions into annuities was a win-win. Quote, by moving pension management to Athene, ATI met its obligations to retirees and made our pension contributions and expenses more predictable. Tom, what's next for the Allegheny Steelworkers? Where do things stand with the lawsuit? They had a hearing in court and that magistrate ruled in favor of Allegheny.

19:39So against them, essentially saying that, you know, that she was recommending that their lawsuit be dismissed because they couldn't actually show that they've been harmed. The checks keep coming. So the kind of the judge overseeing this case is going to make a decision in the next, you know, next month or so. There's been mixed rulings here. Others, like one brought by pension holders from Lockheed, very similar case, same lawyers, a judge found in Maryland, federal judge, that that case can move forward. And that's on appeal right now. So what's really what we're seeing here is I think these things are going to continue to be litigated.

20:18So far, the PE industry hasn't had a major stress test since 2008. And that's influencing how the risk is perceived and how these cases could play out. So we're really looking to see whether or not these investments in private markets, in private credit, asset-backed securities, collateralized debt obligations, if something goes bad in one place, whether it's going to have sort of a domino effect throughout, not just the insurance system, but the overall, the larger financial markets.

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