Furniture in the Closet.

By Mary Williams Walsh

What follows was written by Mary Williams Walsh, a reporter for The New York Times for more than two decades before her retirement in 2021. Her reporting at the Times focused on the intersection of finance, public policy and the aging population. That included pensions; public debt; bankruptcy, especially Chapter 9 municipal bankruptcy; and insurance.

Mary is an extraordinary reporter. This piece is a good example of her remarkable skills.

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The Wall Street Journal had some fun a while back, reporting on a fraudster’s guilty plea to crimes that its own columnist, Jason Zweig, solved all by himself. In a series starting in 2024, Zweig uncovered a onetime broker, Paul Regan, who had conned some 300 people out of more than $50 million, by promising guaranteed returns of up to 17.1 percent per year.

“Any interest you earn is ‘locked in’ and can’t be lost,” said the ads. Zweig knew it was too good to be true, so he made phone calls, stood by his guns, and bit by bit the whole scheme unravelled. Regan, it turned out, had been banned for life from the U.S. securities industry, but he had moved to Medellín and started over.

Wouldn’t it be great if there were more watchdogs like Zweig, warning people away from too-good-to-be-true offers? That’s especially true in the life-and-annuity business. The promises can run for decades, a good deal today can turn into a bad bet by the time you need it, and the financial statements that could steer you out of harm’s way are either hidden behind a paywall or nonexistent.

Suppose you bought a policy from MetLife back in 2007, when it was America’s biggest life insurer, rated AA-, or “very strong,” by Fitch Ratings. You’ve made regular payments ever since to keep it in force. But now the insurer has a different name, Brighthouse. MetLife doesn’t stand behind it any more. Its rating is down to A-minus. Later this year, it will be acquired by a buyout firm, Aquarian, which is smaller and has worse credit. Much of Aquarian’s funding comes from sovereign-wealth funds in Abu Dhabi and Qatar. What do they care about U.S. policyholders?

Aquarian’s $4.1 billion purchase price will go entirely to Brighthouse’s shareholders. There’s no sign of a capital contribution to the company itself. On the contrary: Aquarian plans to shift Brighthouse’s investment portfolio into dicier assets and charge Brighthouse fees for doing so. That will leave less money standing behind your policy.

Should you keep sending in your money? Hard to say. As we’ve noted here before, there’s been a sea change in the once-staid life-and-annuity business. Much of the industry has moved offshore, set up black-box structures, embraced leverage, and paid billions to shareholders out of money that once belonged to policyholders like you.

In the past, you could rely on state insurance regulators to make sure your carrier was solvent. Even now, the Delaware Insurance Department, Brighthouse’s primary state regulator, must bless the Aquarian buyout before it can be done. But how will Delaware decide? If you look carefully at regulatory filings, you’ll see that Delaware hasn’t been holding Brighthouse to its own solvency rules for years.

It’s not just Delaware. In the brave new world of U.S. life insurance, insurers say the state rules are too tough, and regulators in a number of states have offered them relief. As of Dec. 31, 2025, the relief we’re talking about totaled $1.6 trillion – yes, trillion, with a T. At this point, even the regulators seem to have a hard time knowing when enough is too much.

“Regulators must always strike a balance with troubled companies,” said Jane Callanan, general counsel for the Connecticut Insurance Department, in an interview with InsuranceNewsNet in December 2024. The department had just put a troubled insurer, PHL Variable, into “rehabilitation” and was trying to save it. Six months earlier, the department said PHL had a $900 million hole in its balance sheet – but the company’s troubles had first become apparent in 2019. InsuranceNewsNet asked why the department waited five years to intervene.

Callahan said all insurance regulators had to strike a balance between “early intervention” – taking the keys away at the first sign of insolvency – and “allowing companies the opportunity to pursue successful paths out of challenged situations.”

She had a point. No insurance commissioner wants to shut down an ailing insurer if there’s a chance it might recover. There’s no F.D.I.C. for insurance, and policyholders can be badly hurt. But if you opt to give a troubled insurer more time, you run the risk that its problems will grow. If you end up closing it down after all, people will be hurt even more. That’s what happened at PHL Variable. By the time the belated rehabilitation failed, its hole was measured at $2.1 billion. Now it’s in liquidation. (More on that in a future column.)

Callanan wasn’t talking about Brighthouse, but she could have been. Brighthouse put itself up for sale in January 2025, after its capital had been shrinking for five years – not a good sign. Life insurers are supposed to be well capitalized, with enough invested assets to cover all their liabilities – their future payments to policyholders. By law, their balance sheets have to balance. They even have to have a little excess, known as their surplus. If a company burns through its surplus, the regulators are supposed to step in.

But in a Brighthouse quarterly earnings call last year, one analyst said he thought the company had achieved its surplus with a thumb on the scale.

“There’s something problematic about the way you’re projecting and accounting for your liabilities,” said the analyst, Alex Scott of Barclays. “Is that right?”

The chief financial officer, Edward Spehar, declined to answer the question.

Brighthouse Life, the company’s main operating unit, has a large black-box subsidiary, Brighthouse Re, where it sends some of its liabilities. Brighthouse Re’s legal structure is something called a “captive,” and the practice of sending its liabilities there is called “captive reinsurance.”

Please understand: “Captive reinsurance” is sleight of hand. Real reinsurance is an arms-length transaction between two independent parties that transfer risk from one to the other. It’s widely used in the industry and generally considered beneficial. But that’s not what’s happening when Brighthouse Life sends its obligations to Brighthouse Re. When it sends obligations to its wholly owned subsidiary, the risks haven’t really gone anywhere. They’re still at Brighthouse Life. It’s like moving furniture from your living room to your closet – you can’t see it any more, but it’s still in the house.

Why bother? Because captives enjoy strict confidentiality under state insurance law. When Brighthouse Life sends its life-and-annuity obligations to Brighthouse Re, they disappear. They’re not on Brighthouse Life’s balance sheet any more. Brighthouse Re’s balance sheet is confidential. Poof! Brighthouse Life’s balance sheet appears to balance, as required, thanks to captive reinsurance.

This isn’t fraud. It’s been approved by the Delaware Insurance Department – which helps to explain why Alex Scott sounded so exasperated in that analysts’ call. Neither he, nor anybody else, aside from a few company insiders and Delaware regulators, knows how Brighthouse Re plans to pay the obligations it’s been given. We’re talking about billions of dollars.

“It makes it very difficult to value your company,” Scott complained.

CFO Spehar told him the 10-K of Brighthouse Financial – the holding company over Brighthouse Life and other subsidiaries – had “some basic numbers,” but they “are not the most relevant numbers to consider.” Indeed, an insurance holding company’s 10-K is written for shareholders. Not policyholders. A 10-K is filed with the S.E.C. It’s easy to get, and it’s free. But it consolidates the numbers of a whole family of insurers, and a lot of detail gets netted out. Policyholders care foremost about the solvency of the insurer whose name is on their policy. A 10-K doesn’t tell them that.

To get the facts about their own insurer, on a stand-alone basis, a policyholder needs to see the insurer’s filings to its primary state regulator. They’re very detailed. They follow a uniform set of accounting standards, put forward by the National Association of Insurance Commissioners. But they can be hard to get – sometimes impossible. The N.A.I.C. keeps them behind a paywall. Users must register and pay. (Imagine the S.E.C. doing that.) Brighthouse Financial is a big holding company with sophisticated investors, so it puts its state regulatory filings on its website. But many life insurers don’t.

And remember: A captive reinsurer’s regulatory filings are confidential. You could buy every last filing in the N.A.I.C.’s database and you still wouldn’t get one from a captive reinsurer. This matters. Of that $1.6 trillion of obligations to policyholders that U.S. life insurers have tucked away in black boxes, about $1 trillion is in black boxes offshore, beyond the long arm of the states. The other $600 billion has been ceded to captive reinsurers onshore, in the states’ own domiciles. That’s an awful lot of money to take for granted.

When Brighthouse put itself up for sale, it made a small exception to all the opacity: Prospective suitors who signed confidentiality agreements could enter a “virtual data room” and look at all its numbers, even the black-box numbers.

A dozen prospective suitors took a look. All but one – Aquarian – said, “No thanks.” That’s telling you something.

Part of the suitors’ qualms may have been driven by recent concerns about private credit, the loans made by non-banks to smaller companies that can’t get bank loans. Life insurers, including Brighthouse, have been adding private credit to their investment portfolios for at least a decade. But two automotive bankruptcies last fall, of Tricolor and First Brands, unleashed waves of consternation about private credit, because both companies were awash in it. Wall Street now knows there’s a problem, but Wall Street can’t tell where the next blowup will be – hence JPMorgan Chase CEO Jamie Dimon’s oft-quoted remark that with private credit, you don’t know where the next “cockroach” will come crawling out of the woodwork. His bank lost more than $170 million in the Tricolor collapse.

A lot of the private-credit loans and structured securities have been added to life insurers’ investment portfolios through private placements. That means there’s no market price, no public rating by a big agency like Moody’s or Fitch, no disclosure of the structure or of what happens at maturity. Sometimes, instead of a cash repayment, the holder just gets more of the same debt.

“The life insurers are the biggest buyer of private credit funds,” said Alberto Gallo, chief investment officer of Andromeda Capital Management, a London-based firm focused on fixed income. He said he’s been shorting the bonds issued by life insurers, including Brighthouse. (Short trades make money when the price of a security falls.)

“The whole system is very fragile,” Gallo said. “You don’t know which piece is going to fall first. That’s why we decided to short the whole thing.”

So private credit is definitely a problem. But it’s not the problem. It you step back and take in the long view, you’ll see that it’s just the most recent development in the sweeping transformation of the whole life-and-annuity sector.

Brighthouse makes as good an example as any, but to see what happened you have to go back to the 2000s, when it was still part of MetLife – basically, MetLife’s retail business. (MetLife didn’t spin off Brighthouse until 2017.)

MetLife and lots of other life insurers went public around the turn of the millennium. For the first time, they had shareholders. Corporate officers and directors took on a legal duty to act in the shareholders’ best interests. That’s no different from fiduciary duty at any publicly traded company, except that state insurance regulation operates on rules and principles dating back to when the companies were mutuals, owned by their policyholders. In that framework, policyholder interests come first. Much of the sleight of hand we’re seeing today results from company officials and regulators trying to navigate these two conflicting legal frameworks.

Shareholders – we’ll call them Wall Street – aren’t terribly interested in balanced balance sheets or solemn promises to policyholders. They care about returns on investment. They like to see rivers of premium dollars flowing into the insurers they own, but they don’t like the way state regulation expects insurers to invest the money. They argue that it’s wasteful, forcing life insurers to tie up scads of money in low-yielding, high-grade bonds.

In fact, if there’s one thing Wall Street hates to see, it’s life insurers setting up low-yielding reserves to pay claims to policyholders that may not come due for decades. To Wall Street, those reserves are “excess capital,” just waiting to be set free and used to pay dividends and other gains to shareholders, preferably at the end of the next quarter.

The 2000s were the years when America’s boomers – nearly 70 million people – were approaching retirement and wondering how to make their savings last for the rest of their lives. Life insurers were clamoring to sell them annuities, contracts where you pay up front to get a stream of regular payments in retirement. They were especially pushing variable annuities, in which the future payments were tied to the performance of an investment account. But the boomers were wary, having just seen the record-breaking bull market of the 1990s turn to bust.

To get them off the fence, MetLife and its competitors added increasingly generous “guaranteed minimum income benefits” to their variable annuities. It turned into an arms race of promises. To put it very simply, the guarantees gave buyers gains when the markets went up, but their retirement payments couldn’t be reduced if the markets went down.

Sounds a bit like those “locked in” interest rates that made Jason Zweig pounce, doesn’t it? A guaranteed income stream that goes up when the markets rise, then stays up when the markets fall, is going to cost gazillions when you have to start paying it. MetLife and its competitors did charge extra for their guarantees, but not nearly enough to cover the cost.

State regulators expected the insurers to set up adequate reserves. Wall Street expected dividends. How to serve both masters? Captive reinsurance!

In 2001, MetLife set up a big captive reinsurer, Exeter Reassurance, in Bermuda. MetLife sent its variable annuity obligations there. The costly guarantees dropped off MetLife’s own balance sheet. Offshore, out of sight, Exeter secured the guarantees not with bonds, but with a sophisticated “dynamic hedging” system, with hundreds of dedicated servers running complex risk simulations, and dozens of traders using several types of derivatives to adjust their hedge positions as the markets changed.

By securing its obligations that way, MetLife could hold off on dreary, low-paying bonds, while paying shareholder dividends that increased in each of its first seven years as a publicly traded company. From 2001 to 2007 the rate paid to shareholders more than tripled.

Then came 2008 and the Global Financial Crisis. Insurers’ investment portfolios took a beating, especially if they had lots of toxic mortgage-backed securities – and especially if those securities were backed by ersatz bond insurance from A.I.G., which collapsed that fall and had to be bailed out by the taxpayers.

Huge bank bailouts got most of the headlines and taxpayer wrath, but life insurers needed help too. Even as their investments tanked, their annuity obligations ballooned, thanks to those guarantees that stayed high when the markets fell. State regulations required insurers to add to their reserves, but the insurers couldn’t afford to fill such a big hole.

So state regulators offered accounting relief. They let insurers carry most of their shrunken assets at book value, which was higher than the market price. It was forbearance – giving life insurers time to rebuild instead of enforcing the law – and it was widely seen as necessary to shield policyholders in a global crisis. But just like Dr. Strangelove’s Doomsday Machine, it was built without an “off” switch. Life insurers are still using it today, 18 years after the crisis.

At the same time, some spotted an opportunity. Executives at Apollo Global Management, the huge private-equity firm, saw that battered life insurers would be relatively cheap to acquire. In 2009 Apollo took over $1.6 billion of annuity obligations from an Iowa insurer, American Equity, which paid Apollo with bonds from its shrunken investment portfolio. Apollo used the acquisition to found a new insurance operation, Athene.

Athene didn’t have to contend with low-yielding bonds and costly reserves – Apollo set up its core operations in Bermuda. There, it could swap out American Equity’s state-compliant bonds for alternative investments. Private credit would eventually be a favorite. Apollo could originate the private loans and structure the securities for Athene’s investment portfolio; Athene paid Apollo investment-management fees for the service.

Over the next few years Apollo acquired several more languishing life insurers. Athene grew into one of America’s biggest fixed annuity providers. (The guaranteed variable annuity arms race of the 2000s had ended with the financial crisis.) Athene sold annuities in the U.S. through state-regulated affiliates, then transferred the obligations and premiums to its Bermuda operations, beyond the long arm of the states.

It was a huge success. The Apollo-Athene duo attracted the attention of other big private-equity companies. They saw armies of policyholders sending in premiums, which wouldn’t be paid out until far in the future. Meanwhile, the money was being invested according to Apollo’s vision, which included a higher risk-reward profile and plenty of dividends for shareholders. Perfect. Soon they were taking control of other life insurers, setting up their own offshore black boxes, and replacing “excess capital” with financial wizardry. KKR now owns Global Atlantic. Blackstone has acquired Allstate’s life-and-annuity business and renamed it Everlake. Brookfield Asset Management has acquired American National and American Equity. The Carlyle Group has a majority stake in Fortitude Re. And so on. Brighthouse is, in fact, the last big life insurer to remain independent for now.

States saw their regulated life insurers vanishing offshore. A number of them got busy promoting their own quasi-Bermudas – alternative domiciles where insurers could conduct black-box, Bermuda-style reinsurance deals without ever leaving Delaware, Vermont, Arizona, Utah, or any of the other 30-odd states that now permit captive reinsurance. That meant the insurers in their care could shed obligations – $600 billion worth and counting – beef up their balance sheets, and send money to pay shareholder dividends.

MetLife wasn’t so lucky. It had acquired a bank in 2001 and became subject to regulation as a bank holding company. It wanted to keep increasing its shareholder dividends every year, even after the Global Financial Crisis. It said its dynamic hedging program had tided it through the crisis in much better shape than other life insurers.

But by law, MetLife was required to get Federal Reserve approval of its dividend payouts. The Fed had just helped the Treasury bail out banks to the tune of $498 billion, and it wasn’t impressed by MetLife’s offshore hedging activities. It saw derivatives-counterparty risk at Exeter Re that could start up a whole new toxic cascade. Every year, from 2008 through 2012, MetLife sought to increase its dividends. Every year the Fed said No. It also required MetLife to increase its capital, so MetLife issued 75 million common shares, making it even harder to raise the company’s per-share dividend rate.

After five years of hearing the Fed say No, MetLife sold its banking operations and de-registered as a bank holding company. That took the Fed out of the picture, and MetLife promptly increased its dividend by nearly 50 percent.

But not so fast. The Treasury had formed a Financial Stability Oversight Council, with a Congressional mandate to look for “Systemically Important Financial Institutions,” or SIFIs – institutions that were so big and intertwined that if one of them failed it could topple the others. SIFIs were to get an extra layer of regulation, by none other than the Fed.

When the Council designated MetLife a SIFI, MetLife sued. Eventually the designation was reversed, but the fight went on for years.

Meanwhile, New York’s Financial Services Superintendent, Benjamin Lawsky, had also spotted Exeter Re and become concerned. New York was now MetLife’s primary state regulator, and MetLife was America’s largest life insurer. Lawsky could see it sending all those costly variable-annuity guarantees offshore, to be managed in ways that didn’t conform to state insurance rules.

Lawsky started making speeches about “shadow insurance,” saying insurers were “using shell games to hide risk and loosen reserve requirements.” He attracted media attention, but when he called on the other state insurance commissioners to join him in a nationwide moratorium on captive reinsurance, all the states but one, California, snubbed him. Many were busy by then promoting themselves as quasi-Bermudas.

Lawsky may not have realized the power of the current he was swimming against. Athene was burgeoning in Bermuda. No one was calling it a SIFI. Other private-equity firms were buying life insurers and moving operations offshore. States were vying to keep them.

In the middle of all that, MetLife announced that it had heard Lawsky. It would spend about a year unwinding the intricacies of Exeter Re and bringing the business back onshore. It would be and difficult and expensive. Exeter Re was so vast – so laden with costly guarantees – that MetLife would have to combine at least three U.S.-based subsidiaries, just to hold it all.

But MetLife didn’t bring the business back to New York. It went to Delaware instead. Delaware had a statute promising “thorough and swift” authorization of complex reinsurance transactions, because the growth of captive reinsurance was in the “best interests of this State.”

By the end of 2014, the transfer was done. The former Exeter Reassurance had a new name: MetLife Insurance Company USA. An unusual footnote in its regulatory filing for the year said that in Bermuda it had used an offshore method of calculating its obligations. Upon its arrival in Delaware, it didn’t have to calculate them at all.

Departures from the N.A.I.C.’s accounting standards aren’t unheard-of. They’re called “permitted practices,” and their impact on the insurer’s balance sheet has to be disclosed. But MetLife USA’s footnote said that Delaware had granted it “permission not to calculate, record, or disclose the effect of this permitted practice on statutory surplus.”

“This disclosure is truly blowing my mind,” said Tom Gober, a forensic accountant who specializes in reinsurance.

Bringing Exeter Re onshore was “likely one of the most important, massive, and complex affiliated reinsurance transactions in history,” he said. “The N.A.I.C. has always said that when it’s a material transaction with an affiliate, the books must be kept in a way that shows the effect. But MetLife didn’t have to do that. It’s just insane. It means they’re keeping everybody in the dark.”

Doing it that way, he said, made it possible for the new Delaware operations to send money upstream to MetLife Inc., the corporate holding company. That’s who pays dividends to shareholders.

“They know there’s a hole” in MetLife USA’s balance sheet, Gober said. “The fact that they know there’s a hole, and they let them pay out dividends, is allowing them to pay out policyholder money that should have been kept for reserves.”

In 2016 MetLife announced it was going to spin off Brighthouse. MetLife would keep its institutional businesses. Brighthouse Life would take over most of MetLife’s retail operations, including those expensive annuity guarantees from the 2000s. It has a captive reinsurer, Brighthouse Re, in Delaware, where it could hold the “legacy” obligations, out of sight.

Brighthouse Life is still making good on those payments. It’s legally obliged to do so. But it’s not easy. Over the last few years, its payments to policyholders have eclipsed the money it has taken in in premiums.

At the same time, Brighthouse has been buying back stock, which also returns money to shareholders. (Unlike MetLife, Brighthouse doesn’t pay quarterly dividends.) Since the spinoff, Brighthouse has spent $2.2 billion on stock buybacks. Like dividends, they have to be approved by state regulators. They’re not supposed to happen if your balance sheet doesn’t balance. But Brighthouse has its secret weapon, captive reinsurance.

Brighthouse Re’s balance sheet remains confidential, but Brighthouse Life’s filings show the value of the obligations that it “ceded” to its captive, to use the reinsurance term. The year before the spinoff it ceded $2.1 billion of obligations to the captive. By the end of 2016, when the spinoff was underway, it had ceded $8.2 billion. At the end of 2017, after the spinoff was done, it had ceded $18.5 billion. By the end of 2025 it had ceded $24.3 billion.

That’s what’s keeping Brighthouse Life’s balance sheet in balance. But the big and rising numbers make you wonder how long it can continue.

If I were a policyholder, I wouldn’t like to see $2.2 billion used to buy back stock at a time when there’s not enough money to support all the obligations to policyholders like me. In most cases an insurance commissioner is required to hold a public hearing before a significant merger or acquisition. That would be a good place to ask whether those two Middle Eastern sovereign wealth funds are willing to make a large capital contribution, since Brighthouse looks like it’s going to need one. No hearing has been scheduled yet, though.

There’s also a document called Form A, that’s filed with state regulators every time an outside party seeks to take control of an insurer. It contains all sorts of detail, including the backgrounds of the buyers, proprietary business plans, and financial forecasts. Form A could be of great help to policyholders who have begun to doubt how sincerely Delaware is looking out for their interests.

It’s mandatory. It’s sworn. And guess what? It’s confidential.