Annuity holders sue two Mark Walter insurers over $21 billion of loans to affiliates

For $21 billion of affiliated loans to sit inside the 3% to 4% share the insurers had been reporting, Delaware Life and Clear Spring would need combined assets of $525 billion to $700 billion ^[19]. The report does not give their combined balance sheet. I think that denominator decides what kind of case this is. If the books are near that size, the restatement is a quarrel over labels. If they are a fraction of it, policyholders were told one concentration and held several times as much.

The complaint says annuity premiums went into illiquid private-credit loans to Walter and to businesses tied to Guggenheim Partners ^[5]. The two suits, which seek class status for tens of thousands of annuity investors, claim Walter's companies were enriched through premiums, fees and the use of policyholder assets ^[10]. Morningstar DBRS analysts described the same arrangement in neutral terms on the day the complaint was filed. "On paper, the relationship is mutually beneficial, with asset managers seeking permanent capital and insurers seeking long-term yield," they wrote ^[12]. A premium lent to an affiliate is a premium the insurer is not holding in a bond it could sell within a week.

If the loans perform and withdrawals stay ordinary, annuity holders lost information but no money, and the fight is about disclosure. The harder case is the one DBRS flagged, a risk "if more policyholders than expected" pull their money. "In a stressed economic environment, insurers would be forced to liquidate their assets," the analysts wrote ^[13]. Illiquid loans to affiliates are the hardest assets to sell into that. A third path is that state regulators, already weighing wider disclosure and reporting rules for insurers' private credit ^[14], move before any court does.

I'd expect the capital question to bite before the liquidity one. American Banker reported that moving assets from non-affiliated to affiliated changes an insurer's risk profile and capital adequacy, and raises questions about its ability to pay future claims ^[2]. Capital adequacy applies today. A run on annuities may never come. The counter-case is that a capital charge on sound loans is a cost to the owner, and annuitants are harmed only if the loans fail or cannot be sold.

Davidson, the plaintiffs' lawyer ^[8], was blunter. "This appears to be a simple and very easy-to-explain fraud. They told people one thing, and did another and defrauded people," he said ^[17]. "The sad thing is that many senior citizens are on fixed incomes and rely on income payments from annuities," he told American Banker ^[18]. A Group 1001 spokesperson said: "No court has ruled that Group 1001 Insurance or Delaware Life Insurance Company did anything wrong, and we intend to defend the case vigorously, consistent with our long track record of serving policyholders with integrity" ^[11].

As a gauge of how much affiliated private credit sits inside life insurers generally, a complaint against two insurers with one controlling owner is a narrow sample. American Banker links the suit to heightened risks at insurers, including private-equity-owned ones, that hold opaque private-credit investments ^[3]. Measuring that is hard. DBRS analysts wrote that private credit has no standard definition ^[15], and insurers took up the lending that banks dropped after stricter capital rules followed the 2008 crisis ^[16].

This view is wrong if the two books turn out to be close to $525 billion ^[19], or if the restated loans can be sold near par when withdrawals rise.