Complex and Opaque.

$1 trillion of U.S. life-and-annuity business has moved to Bermuda.

Since leaving The New York Times, Mary Williams Walsh has written a number of pieces for News Items about “private-equity-influenced reinsurers”. This one revolves around a lawsuit filed by a couple of retirees from Lumen Technologies. Lumen is the sixth company to be hit with such a lawsuit this year. The others were filed against Bristol-Myers Squibb, General Electric, Alcoa Corporation, Lockheed Martin, and AT&T. It’s safe to say the Lumen lawsuit won’t be the last.

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Last spring, we described the International Monetary Fund’s concern about the flood of American retirement money that’s been going to Bermuda and other offshore insurance domiciles. In its semiannual Global Financial Stability Report, the IMF reported that “private-equity-influenced reinsurers” had drawn $1 trillion of U.S. life-and-annuity business out of the U.S. states where it originated, and put it in Bermuda. State insurance regulation is designed to promote stability and protect policyholders. Offshore, the reserve requirements are lower, the disclosures are less detailed, and the investments are more aggressive.

One of the IMF’s jobs is to watch for possible sources of systemic risk. It warned of “regulatory arbitrage across sectors and borders” in the flow of retirement money offshore, and said the relevant regulators really ought to get onto the same page. But that hasn’t happened. The IMF isn’t an insurance regulator, and it can’t force either regulators or insurance companies to do what needs to be done. 

Now, some of the retirees being swept along by this wave have taken matters into their own hands and sued — not their insurers, or the brokers who sold them annuities, but their former employers, who had traditional pension plans they didn’t want to operate any more. 

The latest lawsuit was filed this month by a couple of retirees from Lumen Technologies. In 2021 Lumen paid Athene Annuity and Life Co. $1.4 billion to take over the pensions of 22,600 people. As is typical in these deals, those 22,600 people had no say over which insurer would take on their pension obligations. Their complaint calls Athene “a highly risky private equity-controlled insurance company with a complex and opaque structure.”  

Lumen is the sixth company to be hit with such a lawsuit this year. The others were filed against Bristol-Myers Squibb, General Electric, Alcoa Corporation, Lockheed Martin, and AT&T. In every case, the insurer who took over the pensions was Athene. 

Because there’s significant regulatory arbitrage baked into these deals, the retirees don’t have a case against Athene — even though they see Athene as the culprit who spirited their retirement money offshore without their permission. Athene operates in Bermuda, a British territory, where it’s beyond the long arm of America’s federal pension law. But the retirees can sue Lumen, because the federal pension law gives Lumen a fiduciary duty to put their interests first as it chose a life insurer to take over its pension plan. 

There’s a document known as Interpretive Bulletin 95-1, or “I.B. 95-1,” which tells employers how to conduct an above-board search for the right life insurer. If the employer follows I.B. 95-1, it will end up in a “safe harbor,” where retirees can’t accuse it of breaching its fiduciary duty to them. 

I.B. 95-1 says the employer can’t just choose whichever insurer offers the lowest price, for example. Nor can the employer rely solely on the life insurers’ credit ratings, because credit ratings sometimes lag behind economic reality. To fulfill its fiduciary duty, the employer is supposed to conduct “an objective, thorough and analytical search,” for the insurer that offers “the safest annuity available.”

There’s an intriguing elephant in this particular room. I.B. 95-1 was written in response to the collapse of Executive Life, a big Los Angeles-based life insurer that overdosed on junk bonds, collapsed in 1991, and left tens of thousands of annuitants in the lurch. Federal regulators wrote I.B. 95-1 because they didn’t want companies to pick any more high-risk life insurers to take over their pension plans in the future.  

Executive Life got its junk bonds from Drexel Burnham Lambert, the L.A. firm of Junk Bond King Michael Milken, who used the bonds to finance the work of notorious corporate raiders like Ivan Boesky. Companies were raided, jobs were lost, and Milken became Public Enemy Number One for a time. He was prosecuted by an ambitious young U.S. attorney named Rudy Giuliani and given a ten-year prison sentence, a $600 million fine, and permanent expulsion from the securities industry. (He was later pardoned by then-President Donald Trump, and today he runs a respected think tank.) 

Milken’s firm disappeared in the chaos but his junk bonds didn’t. After Executive Life was seized by the California insurance commissioner, a Drexel alumnus named Leon Black bought its junk-bond holdings for about half their stated value. The bonds’ prices had tanked, toppling Executive Life, but they were, in many cases, still repaying their principal with interest, right on time. They promised a tremendous yield if you could stomach the risk. Black, a Milken protégé, certainly knew that. So did two other Drexel alumni, Marc Rowan and Josh Harris, who joined him and used the high-yielding stash to found and capitalize Apollo Global Management — the parent today of Athene, the insurer that today’s retiree-plaintiffs want nothing to do with. 

Black left Apollo in 2021, amid questions about his ties to the late sex offender Jeffrey Epstein; Harris left in 2022 to focus on sports investments. But today Rowan is Apollo’s CEO and is often credited with building Athene, which thrives on high-risk-high-reward investments that state-regulated life insurers shunned in the past. 

The Lumen plaintiffs say Lumen couldn’t possibly have thought Athene offered “the safest annuity available.” If Lumen had performed “an objective, thorough and analytical search,” as required, they say, it would have noticed, among other things, that:

–One-fifth of Athene’s investments are “risky asset-backed securities and leveraged loans,” which Bermuda insurance regulators let it count as corporate bonds, even though they “have greater downside risk.” 

–Athene’s $20.6 billion of Collateralized Loan Obligations are classified as BBB credits, one notch above junk, “a higher concentration than that of most other U.S. life insurers.”  

–To value the non-trading securities it holds, Athene gets “unreliable private letter ratings” from smaller ratings firms known for giving higher ratings than the majors. Higher ratings result in lower capital requirements for Athene.  

–Athene has issued billions worth of callable notes, which it does not properly count as debt, setting up a possible liquidity crisis if the notes are called during a market downturn. 

–Athene claims to have an ample “surplus,” meaning that its assets are worth more than its liabilities. But it’s citing the consolidated surplus of Athene’s parent holding company, which is misleading, the lawsuit says. The annuitants don’t have any claim against the assets of the holding company, just against the assets of their stand-alone carrier, which are not disclosed. 

On and on goes the complaint, page after discouraging page, a passing parade of all the ways U.S. insurance regulation has been trampled in the rush to get retirees’ money offshore. 

“A diligent and thorough investigation into Athene’s surplus would have disqualified Athene from being selected as the ‘safest available’ annuity provider,” it says. “Defendants’ decision to use Athene as the annuity provider harmed, and will continue to harm, plaintiffs and other similarly situated Lumen retirees and beneficiaries over an extended period of time, through uncompensated risk.” 

Years ago, before retirement money started moving offshore, the occasional company would offload its pension plan onto an insurer, and the retirees would sue. Their lawsuits never got off the ground, though. The judges could see that the retirees were still getting the same monthly payments as ever — from an insurer, true, not from their former pension fund, but what difference did that make? The judges ruled that since the retirees were still getting the same monthly amounts, they hadn’t been damaged, so they had no case. 

Things are very different now in the life-and-annuity business, however, and this year’s crop of lawsuits turn on the differences. The plaintiffs argue that when their pension obligations were sent to Athene, they were forced to bear significant risk that they haven’t been compensated for. In other words, they do have damages. And they use “bond math” to show how to measure the damage in dollars.

Investors who buy bonds demand a risk premium to compensate them for riskier bonds. If you buy a junk bond, for example, you expect it to yield about 4 to 6 percentage points more than a comparable AAA bond. If it doesn’t, you won’t buy it. Nobody forces you to hold junk bonds without collecting the bigger yield — but that is, in effect, what the Lumen retirees say happened to them. They may still be getting the same monthly payments at this point, but they got a shakier deal over the long term, and that’s a loss. 

To measure it, the plaintiffs turn to a 2022 paper by David Eichhorn, “Pension Risk Transfers May Be Transferring Risk to Beneficiaries.” Eichhorn is the chief of NISA Investment Advisors, a $400 billion investment management firm that works with bonds and derivatives. He’s an unapologetic math nerd who knows his way around bond values and remembers what happened to Executive Life. 

When the current pension-buyout boom started, Eichhorn didn’t think the “safest annuity available” requirement was being observed. He realized it would be easy to test his hunch.

“Fortunately, the bond market provides a clear, quantitative measure of an issuer’s default risk – specifically, its credit spread,” he said. 

He didn’t have to do fancy-shmancy calculations. He took a sample of nine life insurers, one of which was Athene, and looked at the credit spreads that each had to pay when it borrowed. That was the market’s opinion of each insurer’s default risk. The range between the credit spread of the safest insurer, New York Life, and the riskiest, Athene, was 1.4 percentage points. 

That might not sound like much — until you remember that annuities are long-dated promises, and those 1.4 little percentage points will be multiplied by lots of dollars and years. “They are really a big deal,” Eichhorn said. 

He also compared each insurer’s credit spread to the spread implied by its published credit rating. Just as I.B. 95-1 had observed nearly 30 years ago, the markets don’t see eye-to-eye with the credit analysts. The markets thought two of the nine insurers were safer than the credit analysts did, but the other seven were all riskier. The markets were most skeptical of Athene’s published credit rating of A+. Its credit spread implied it should have been rated BBB-, or one notch above junk.  

After ranking his nine-insurer sample from the safest to the riskiest, Eichhorn found that retirees in general would take an economic loss of 14 percent if their employer chose Athene over New York Life. That means the Lumen Technologies retirees took a loss of $196 million when their $1.4 billion of pension obligations went to Athene instead of New York Life, which, at the time of Eichhorn’s research, really did offer “the safest annuity available.” 

“It gets increasingly tenuous to argue a given insurer is indeed ‘safest available’” when they’re ranked dead last on a list of nine big insurers, Eichhorn said. And yet Athene has been doing more pension-to-annuity deals than anyone else.

It’s hard to argue with Eichhorn’s logic. We have a market economy, where the collective wisdom of all participants is said to be reflected in market prices. If the credit markets see Athene as a risky borrower, there’s no reason for annuitants to think it offers the “safest annuity available.”