Wall Street products, Main Street regulators

Speaking about the unfolding debacle at Mark Walter’s Delaware Life, Apollo CEO Marc Rowan asked: “If one was not aware of affiliate transactions relating to three high-profile sports teams that we can all name, what are you doing as a regulator?” He also warned of a state “race to the bottom” creating “onshore Caymans.”

That’s rich, coming from the head of the firm that pioneered PE-owned annuity writing through Athene.

But Delaware Life shouldn’t surprise anyone. It is the latest chapter in a 45-year story of Wall Street products overseen by Main Street regulators.

1979: A Wall Street product lands on a Main Street desk

In 1979, a small California carrier soon renamed E.F. Hutton Life introduced Universal Life. By 1983, nearly every major insurer had one. UL unbundled whole life and let it compete head-on with money market funds in an era of double-digit yields.

It was also something new for regulators. A rate-sensitive product, designed by a Wall Street firm and dependent on assumptions policyholders could barely see, landed under state insurance regulators built for guaranteed whole life. That decision, made mostly by default, set the pattern: products and balance sheets grew more sophisticated, and the referee stayed the same.

The bills come due

As rates fell through the late 1980s and ’90s, UL policies sold on 11% and 12% illustrations underperformed. “Vanishing premiums” didn’t vanish, and the sales-practice litigation cost the industry billions. Anyone selling indexed UL today should find this familiar. In 1991, Executive Life collapsed under roughly $9 billion of junk bonds, then the largest insurance failure in U.S. history. That same year, California seized First Capital Life, Hutton Life’s successor.

A new master, and the search for capital relief

Then came demutualization. I lived through it at Equitable, an early mover. In the early ’90s, one of America’s oldest and most respected life insurers was days away from insolvency, billions underwater on guaranteed interest contracts written in the high-rate ’80s. CEO Dick Jenrette found a white knight in Paris-based AXA. Viva la France! Others followed, and the industry gained a new master: shareholders expecting quarterly earnings from promises lasting 40 years.

Then, when 2008 exposed mispriced variable annuity guarantees, carriers turned to financial engineering, shifting reserves into captive reinsurers in friendly states or offshore. In 2013, New York regulators found $48 billion in “shadow insurance” at New York-based insurers alone. The playbook of moving liabilities where regulators can’t fully see was well established.

Private equity simply scaled it.

Private equity reads the rulebook

In 2009, Apollo helped found Athene. The insight was elegant: own the insurer, invest its long-dated annuity money in credit you originate, earn fees on both sides and keep the spread. Others followed, KKR with Global Atlantic and Blackstone with Allstate Life. According to ALIRT, privately owned insurers grew from 2.5% of U.S. life industry invested assets in 2011 to about 19.8% by the end of 2025, roughly $1.2 trillion.

To be fair, private equity brought capital, investment talent and better rates for consumers. But those rates rest on regulatory arbitrage: capital rules that go easy on private assets, small issuer-paid rating agencies, and affiliated reinsurers in Bermuda or the Caymans largely beyond U.S. regulators’ view. When one owner controls the insurer, the asset manager and the reinsurer, every transaction is a related-party transaction.

The results are showing. At A-CAP, owned by 777 Partners, policyholder money reportedly flowed into 777’s own ventures. PHL Variable, owned by Golden Gate Capital, is headed toward liquidation with a $2 billion deficit, shattering the assumption that policyholders are always made whole. And at Delaware Life, which has not been charged and says its capital remains strong, related-party investments reported at $1.4 billion turned out to exceed $17 billion, 39% of invested assets.

The wrong referee for the game

The problem is structural. Since 1945, insurance has been regulated state by state, by elected or appointed officials whose core mission is consumer protection. Few have run a portfolio, structured a CLO or priced a reinsurance treaty.

Delaware’s commissioner, directly responsible for Delaware Life, came to the job after two decades in law enforcement. Nothing in our system requires the person overseeing a $69 billion insurer to understand private credit. That isn’t a knock on him; it’s an indictment of how we choose them. As former Mississippi examiner Tom Gober put it, state insurance departments “are underfunded, understaffed and under-sophisticated.”

Meanwhile, the rules lag the market. The NAIC adopted new related-party reporting codes in 2022, yet Delaware Life’s filings still understated its affiliate exposure more than tenfold.

What to do about it

The answer isn’t to drive private capital out of insurance. It’s to match the referee to the game, at the point of sale and on the balance sheet. Six changes would go a long way:

1. One sales regulator. Move indexed life and annuities under FINRA, as variable products already are. The SEC tried with Rule 151A, but a court vacated it in 2010 and Dodd-Frank’s Harkin Amendment kept indexed annuities with the states. It’s time to revisit.
2. A specialist bench. Pool investment, actuarial and reinsurance experts through the NAIC for asset-intensive insurers, wherever they’re domiciled.
3. Cap affiliated assets. A 39% affiliated portfolio should trigger action, not a footnote, especially when the affiliates include the Dodgers. (Full disclosure: I’m a Padres fan.)
4. Look through offshore reinsurance. Require full reporting from affiliated offshore reinsurers, or collateral posted onshore.
5. Stop outsourcing credit judgment. Capital charges should reflect an asset’s economics, not an issuer-paid rating.
6. Create a federal backstop for the largest, most complex insurers, through an optional federal charter or a stronger Federal Insurance Office.

Advisors can’t wait for reform. Know who owns the carriers you recommend, assume a PE parent won’t rescue a failing subsidiary, and match duration to trust. Advisors shouldn’t have to do the regulators job, but until changes are made, we have to protect ourselves and our clients. 

The tip of the iceberg

I’ve spent four decades in this business, and I believe in what life insurance and annuities do for families. Since 1979, every chapter, from vanishing premiums and Executive Life to shadow insurance, PHL Variable and now Delaware Life, has been a variation on the same mismatch; sophisticated Wall St products policed by Main St regulators. Delaware Life is not the problem. It is the tip of the iceberg, and the rest will stay below the waterline until we give regulators the tools, the talent and the authority to look.

John Lefferts, CFP®, CLU, ChFC, is a senior wealth management executive with more than 35 years of experience building and leading advisor platforms across the wirehouse, independent broker-dealer, and RIA channels.