The Bermuda Triangle Strategy: Private Equity's Impact on Life Insurance

Private equity's growing influence in the U.S. life insurance and annuity market has introduced substantial changes, especially through a strategy that shifts risk offshore, primarily to Bermuda. This tactic, commonly seen in U.S. life insurers acquired by or in collaboration with private equity firms, has raised concerns among industry analysts and regulatory bodies. Kerry Pechter, editor of the Retirement Income Journal, has labeled these practices as a "Bermuda Triangle" where transparency and liquidity issues could arise.

Bermuda Triangle Strategy Explained

The "Bermuda Triangle" strategy involves a complex network of relationships among large asset managers, U.S. life insurers, and offshore reinsurers. These asset managers, substantial players in private equity and credit markets, acquire life insurers and manage their assets. The life insurers issue annuities, providing a steady flow of funds that are invested in higher-yield assets managed by affiliated private equity firms. Offshore reinsurers, in places like Bermuda or the Grand Cayman, help mitigate the investment risks.

Kerry Pechter discussed with The National Law Review the rapid adoption of this strategy, remarking, "Many asset managers and life insurers have adopted pieces of this strategy. However, in the Triangle’s purest form, all three entities are within the same holding company, overseen by the same executives."

Market Impact and Regulatory Concerns

The strategy has advanced rapidly since Apollo introduced it by establishing Athene in 2009. By 2022, the Apollo and Athene merger positioned them among the top annuity providers in the U.S. Analysts have observed that other private equity firms are mimicking Apollo's model, acquiring life insurers, raising capital through annuities, and forming offshore reinsurers to broaden their reach.

This trend has sparked significant regulatory compliance concerns. State regulators, responsible for protecting U.S. policyholders, find their oversight capabilities challenged by these offshore constructs. The Bank of International Settlements (BIS) flags potential conflicts of interest, emphasizing that private equity-backed insurers might favor riskier investments, potentially destabilizing insurance markets.

Case Studies of Concern

Recent failures such as PHL Variable Insurance Co., owned by Golden Gate Capital, and issues with 777 Partners' offshore dealings, highlight vulnerabilities within the Bermuda Triangle strategy. These incidents have led to substantial financial shortfalls and regulatory interventions, provoking wider industry apprehension.

Need for Transparency

Industry experts stress the harmful impacts of limited transparency associated with offshore reinsurers. Forensic accountant Tom Gober warns of the risks to policyholders when critical financial data remains undisclosed. The Financial Stability Oversight Council (FSOC) echoes these concerns, noting that moving reserves offshore can diminish policyholder protections due to less stringent reserve requirements.

Future Outlook

The industry's dependence on reinsurance has intensified, with U.S. life insurers increasing their offshore ceded reserves. This evolving condition calls for careful regulatory scrutiny to mitigate systemic risks. As Pechter and other experts continue to observe these developments, they advocate for enhanced transparency to ensure policyholder confidence and stabilize market operations. The long-term viability of the Bermuda Triangle strategy remains a contentious topic among industry stakeholders.