Life Annuity Specialist reported on the September 8th hearing of the Senate Banking Committee:
“Senate Banking Committee members grilled regulators Thursday on whether they are ‘stepping up’ to address perceived risks that private equity involvement in the life insurance industry poses to retirees and workers…
“[Senator Warren] said private equity-backed insurers can ‘jack up their returns and their short-term profits’ by making riskier and more complex investments. ‘But the pensions are more vulnerable to being wiped out by a market downturn which endangers the insurance companies’ insolvency,’ Warren added.
“She said that one-fifth of Athene’s portfolio is invested in risky asset-backed securities and leveraged loans made to companies highly in debt.”
Concerns about pension benefits being transferred to private equity owned insurers were front and center at today’s Senate Banking Committee hearing.
Senator Brown opened the hearing by remarking on Lockheed Martin’s transfer of $4.3 billion of pension obligations to Athene, owned by Apollo Global Management.
Senator Brown said,
“Overnight, Lockheed Martin employees and retirees were notified that their pensions would be managed by Athene and no longer covered by ERISA or the Pension Benefit Guaranty Corporation. Many employees are exceptionally nervous about that. It’s one recent example of private equity giants’ expansion into people’s pensions and into the insurance industry. We know that workers end up worse off when Wall Street private equity firms get involved. We’ve seen it over and over again in industry after industry.”
In questions to Steven Seitz, Director of the Federal Insurance Office, Brown asked about this loss of federal protections and what risks could be posed to workers and the broader financial system.
Senator Elizabeth Warren asked Seitz if pension benefits transferred to Athene are as financially secure as they were before the transfer.
Senator Warren said,
“Exposing Americans’ retirement savings to more risk is exactly how private equity makes its money. Riskier and more complex investments mean that private equity-backed insurers can jack up their returns and their short-term profits, but the pensions are more vulnerable to being wiped out by a market downturn which endangers the insurance company’s solvency… For example, one fifth of Athene’s portfolio is invested in risky asset backed securities and leveraged loans made to companies that are already highly in debt. Even worse, many of Athene’s risky investments are created or managed by the parent company, Apollo, itself. This means that Apollo collects fees on the investments that it directed its insurance arm to make… This is a problem of more risk, and the risk is borne by people who have invested for all their working lives in their retirement security.
Senator Warren called for federal and state insurance regulators to step up and address the risks that private equity poses to pensioners and workers.
“I appreciate that Treasury and NAIC are looking at this issue closely, but enough studying. It is time to act. I look forward to working with both of your offices to ensure that happens.”
Today, the US Senate Committee on Banking, Housing, and Urban Affairs announced a hearing on the insurance industry will be held on September 8th.
Committee Chairman Senator Sherrod Brown is expected to address the issues related to private equity and retirement security in the hearing, among other issues. On August 5th, Brown wrote in a follow-up letter to the Federal Insurance Office (FIO):
“…FIO should work to examine the growth of offshore reinsurance markets and increased risk-taking behavior across the life insurance industry, which could contribute to increased systemic risk across the financial system,” wrote Brown. “I look forward to discussing these issues, and broader insurance industry matters at an upcoming hearing before the Committee on Banking, Housing, and Urban Affairs.” Read more.
In March, Senator Brown sent letters to the NAIC and FIO asking them to study what risks the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders.
In response to Senator Brown, the FIO identified potential concerns, including:
“Regulatory incentives may help drive private equity-owned insurers to incorporate substantial reliance on offshore risk-bearing entities for certain blocks of business, potentially masking from U.S. regulators the full scope and magnitude of risk to U.S. policyholders.
“The increased use of complex investment strategies has led to the greater prominence of illiquid and volatile assets on insurers’ books. This could contribute to potential market liquidity concerns, valuation challenges, uncertain levels of credit risk, and potential concentration risk, which could intensify under situations of economic uncertainty or dislocation.”
UNITE HERE applauds Senator Brown’s focus on workers and retirees.
On March 16, 2022, Senate Banking Committee Chairman Sherrod Brown wrote to the National Association of Insurance Commissioners (NAIC) and the Federal Insurance Office (FIO) of the U.S. Treasury Department highlighting concerns about private equity’s growing role in the insurance industry and asking the two regulatory bodies to further study the issue and report to Congress no later than May 31, 2022.
According to the Senator’s letter,
“Investment firms like asset managers and private equity funds often take on much higher risk strategies than traditional insurance companies, and do not face all of the same capital, liquidity, and policyholder protection requirements as well-regulated insurance companies. Consequently, many workers who chose to invest their retirement savings in conservative and long-lived insurance firms now find themselves paying premiums to much riskier firms with less experience in the insurance business. While investment firms might benefit from huge profits in the short term, failure to adequately manage these risks may ultimately cost policyholders their retirement incomes.”
Senator Brown’s letter also expressed concern about the growing presence of private-equity-backed life insurers in the pension risk transfer (PRT) market and specifically referenced several recent PRT transactions, including Athene’s assumption of pension obligations to workers and retirees of Lockheed Martin and Alcoa.
Below are the questions Senator Brown asked FIO and NAIC to examine:
- What risks do the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders?
- What risks do lending and other shadow-bank activities pursued by companies that also own or control significant amounts of life insurance-related assets pose to policyholders?
- Are there risks to the broader economy related to investment strategies, lending, and other shadow-bank activities pursued by these companies?
- In cases of pension risk transfer arrangements, what is the impact on protections for pension plan beneficiaries if plans are terminated and replaced with lump-sum payouts or annuity contracts? Specifically, how are protections related to ERISA and PBGC insurance affected in these cases?
- Given that many private equity firms and asset managers are not public companies, what risks to transparency arise from the transfer of insurance obligations to these firms? Will retirees and the public have visibility into the investment strategies of the firms they are relying on for their retirements?
- Are state regulatory regimes capable of assessing and managing the risks related to the more complex structures and investment strategies of private equity-controlled insurance companies or obligations? If not, how can FIO work with state regulators to aid in the assessment and management of these risks?
On December 7, 2021, the Financial Stability Task Force of the National Association of Insurance Commissioners (NAIC) discussed private equity ownership of life insurers. The task force will assign a subsidiary working group to examine issues related to private equity ownership of insurers (though not necessarily exclusive to private equity-owned insurers). It published a draft list of the issues to be considered.
The list specifically includes issues related to pension risk transfers like Athene’s transactions with pension plans sponsored by JCPenney, Lockheed Martin and Alcoa. It includes consideration of the complex investments used by private equity-owned insurers to support these pension obligations and how obligations to plan beneficiaries would be met if the investments do not perform as expected. It also includes a review of Department of Labor protections for pension beneficiaries and state guaranty association coverage of benefits.
Another issue listed in the draft document is the use of offshore reinsurers and complex affiliated sidecar vehicles. Athene disclosed that in 2020 it reinsured 80-100% of deposits held by its US insurance subsidiaries to its Bermuda reinsurance subsidiaries. Athene also stated that it used a sidecar investment vehicle in the JCPenney and Lockheed Martin transactions.
The task force is made up of state insurance commissioners, including those from Florida, New York, Pennsylvania, Texas, and California each of whom has received multiple emails from workers and retirees over the past several months asking them to investigate Apollo-backed Athene’s pension risk transfer deals. As of December, those five insurance Commissioners on the Task Force had received a combined 115 such requests via this website alone.
Retirees whose pension benefits are now in the hands of Athene may be interested in following these developments.
Read the NAIC’s full list of draft regulatory considerations here.
Illinois State Treasurer Michael Frerichs, Wisconsin State Treasurer Sarah Godlewski, and Colorado State Treasurer David Young sent a letter to Secretary of Labor Marty Walsh calling for new guidance from the Department of Labor to ensure the safekeeping of retirement assets when plans transfer liabilities to insurers.
Citing the growing role of private equity-backed insurers in the annuity and pension risk transfer markets, including Athene’s recent annuity buyout of the JCPenney pension plan, the treasurers called on the DOL to issue additional guidance.
“When retirement assets are put into riskier, more complex financial instruments outside the governance of ERISA and PBGC, it behooves regulatory agencies – at both the federal and state level – to ask tough questions and provide guidance to protect plan fiduciaries and beneficiaries. We believe that this fast-evolving area of pension transactions requires additional review and regulatory guidance. Accordingly, we urge DOL to issue additional guidance to pension plan fiduciaries.”
UNITE HERE is a union of hotel, casino, and food service workers. Our members are beneficiaries of pension funds with over $60 billion in assets.
Nothing on this website should be construed as investment advice.