Is Private Equity Destroying the Life Insurance Industry? | The Real Eisman Playbook Ep 64

Summary of video content: “Is Private Equity Destroying the Life Insurance Industry? | The Real Eisman Playbook Ep 64”

1) Why private equity entered life insurance

• Steve Eisman interviews life insurance analyst Tom Gallagher (Evercore) as a “second opinion” to counter earlier concerns raised by Tom Gober (a former life insurance examiner) about private equity ownership.
• Gallagher explains that a major early entry was Apollo’s purchase in 2012 of a fixed indexed annuity platform (American Equity Life/Athen), which later moved through stages of ownership (public → private → more private).
• The main private equity / alternative managers in the sector include Apollo, KKR, Carlyle, and Blackstone, each with different ownership structures and strategies.

2) What attracts private equity to insurers

Gallagher’s central argument is that private equity treats life insurers as “permanent capital” vehicles—they provide long-duration liabilities that can be invested for attractive returns.

• The thesis: traditional insurers are overly conservative on the investment side.
• Private owners aim to improve risk-adjusted portfolio yields, then potentially grow their asset-management businesses via fee opportunities.

3) How much extra risk private equity takes (and whether it’s dangerous)

Gallagher partially validates the criticism:

• Private equity–linked investment managers do take more risk than traditional life insurers.
• However, his “bottom line” is that for the largest players, it doesn’t look like an immediate “smoking gun.”

Key points he raises:

• He cites data suggesting private-credit yields are about ~100 bps higher than traditional life insurer portfolios (example: traditional ~5.0–5.5% vs alternatives ~6.0–6.5%).
• He argues much of the difference is driven by:
  • Illiquidity
  • A willingness to use structured securities (e.g., CLO tranches, ABS, and even niche structures like aircraft leasing)
• He says he isn’t seeing extreme credit concentrations that would typically alarm investors (he contrasts this with examples such as large floating-rate debt concentrations or “loss-driven” software exposure).

What he does flag:

• Concentration risk: alternatives may take larger positions once they find better risk-adjusted returns.
• Category vs structure risk: underwriting credit fundamentals may look acceptable, but the structure (CLO tranche selection, reliance on subordination, and mark-to-market effects) can introduce volatility.
• His biggest concern is not Apollo/KKR-scale platforms, but smaller or mid-sized quasi-alternative-backed insurers, which he claims show more evidence of higher-risk portfolios (he mentions Security Benefit Life and Sammons Group).

4) Reinsurance and the “Cayman/Bermuda” issue

A major part of the discussion focuses on how reinsurance is used to shift liabilities and reduce the impact of conservative U.S. statutory reserving assumptions.

Gallagher explains:

• The U.S. statutory framework is viewed as overly conservative, so companies have historically used reinsurance (including captives) to “unlock conservatism.”
• Regulators have effectively allowed these arrangements as a practical “accommodation,” partly to avoid companies exiting U.S. oversight.

On why attention shifted toward the Cayman Islands:

• He argues Bermuda is less favorable now / offers less of the capital arbitrage it once did.
• Cayman is viewed as a potentially more lenient alternative, though transparency is limited.
• He estimates only a small number of companies use it (about four or five) to move some liabilities.

5) Big historical tail-risk problems in insurance (and what changed)

Gallagher describes how the sector shifted over the last ~20 years—earlier industry practices didn’t properly account for tail risk, and then the GFC forced repricing and risk transfer.

Three major tail-risk product categories that “blew up”:

1. Long-term care
   • Mispricing from flawed assumptions that later failed (e.g., lower lapse/claim duration assumptions changed as rates fell and claim durations increased).
2. Variable annuities with embedded guarantees
   • Hedging mismatch: companies used short-dated option hedges (e.g., 3-month hedges) against long-duration guarantees.
   • In the GFC environment, hedge costs spiked, crystallizing losses and straining capital.
3. Secondary guarantee universal life (SGUL)
   • High credited-rate guarantees assumed higher lapse rates.
   • Lapses fell dramatically (example cited: assumptions in the mid/high single digits vs reality around ~1%), meaning guarantees persisted longer and became more costly.

What improved afterward:

• Large insurers and the broader market increasingly shifted to risk transfer (selling/ceding blocks of business rather than holding tail risk).
• Example: insurers reinsure variable annuity risk into a private risk-taking vehicle (Gallagher specifically mentions an Apollo-linked reinsurer vehicle called Venerable).
  • That vehicle uses multi-year hedging horizons (e.g., 2–3 years) rather than quarterly hedging to reduce volatility and cost.
• Gallagher’s framing: tail risks have shrunk for much of the industry because specialized counterparties increasingly absorb them.

6) Public market valuation debate: why low multiples persist

Eisman presses on why insurers don’t buy back shares aggressively despite depressed forward earnings multiples.

Gallagher attributes it mostly to structural and credibility-related factors:

• The sector carries stigma from past blowups involving long-duration guarantees and reserve misassumptions.
• Investors worry about:
  • Spread compression and competitive pressure
  • The annuity market’s cycle: spreads widened in 2023–mid-2024, then later faced pressure as low-cost liabilities rolled off and Fed cuts began
  • Concerns about private credit (which he suggests investors may partly misunderstand or conflate with broader “retail private credit” issues)

He also describes a “knife fight” dynamic:

• Alternatives compete for annuity/retail fixed-income flows, which may require:
  • More investment risk, and/or
  • More attractive guarantees
• That competition can pressure traditional insurers’ economics and therefore their valuation.

On share repurchases:

• Gallagher agrees buybacks can make sense at low multiples, but notes complications:
  • Capital structure constraints
  • Preferred stock costs
  • Rebuilding after prior charges
• He references that Equitable/Corridor and others have been doing buybacks, but not all can scale quickly.
• He specifically mentions Lincoln Financial:
  • It was hit by a major SGL-related reserving charge tied to mortality/lapse/interest rate assumptions.
  • After working through the aftermath, he expects they’ll be more able to accelerate buybacks once capital and pref-related issues clear.

7) Are alternative-managed insurers “eating everyone’s lunch”?

Eisman suggests alternatives manage risk better and outcompete traditional insurers. Gallagher’s response is more nuanced:

• There is a perception that alternatives are outperforming and taking share.
• But he argues it’s not uniformly catastrophic:
  • He claims some large alternative-backed players (e.g., Corridor/Equitable) are still growing on net flows.
  • He says Lincoln is shrinking in net retail annuities mainly due to legacy variable annuity runoff, not solely losing fixed annuity share.
• He emphasizes that brand/distribution still matters in some channels, and traditional insurers may retain edges through rating/brand/legacy relationships.

8) Notable proposed takeaway conclusion (Eisman’s)

• Eisman’s takeaway is mixed:
  • Gallagher isn’t especially nervous about large alternative managers taking incremental risk.
  • But Gallagher is more cautious about smaller players.
• In Eisman’s view, the larger reason the sector struggles publicly is investor distrust driven by repeated historical blowups, which keeps valuations depressed.
• He concludes there may be limited near-term opportunities in public stocks due to valuation and trust issues, but private equity/alternatives remain important to monitor.

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Presenters / contributors

• Steve Eisman (host/interviewer)
• Tom Gallagher (life insurance analyst, Evercore)
• Professor Ben Zaperski (announced for a future upcoming episode; mentioned but not interviewed in this video)