(Bloomberg) -- Private equity firms have become enamored with insurance and the stable money it provides for credit bets. Todd Boehly is taking it a step further with Security Benefit Life Insurance Co.
The firm is central to the billionaire’s plan to consolidate many of his holdings as he builds an asset-management power named Eldridge, taking a page out of the playbooks of Apollo Global Management Inc. and KKR & Co. Those industry pioneers have used in-house insurers as ready buyers for some of the private credit products they originate. Security Benefit has raised the ante by holding a quarter of its invested assets — about $11.8 billion — in loans granted to other Eldridge affiliates.
The strategy stands out: Security Benefit had more collateral loans to affiliated borrowers than all other US insurers combined, according to the most recent data. It also has piled into structured credit and lower-rated bonds to a greater extent than others. That’s prompted scrutiny from ratings firms, regulators and creditors, some of whom have balked at investing.
“These types of assets could become illiquid very fast, especially in a crisis environment like the one we had back in ‘09,” said John Han, a credit analyst at F/m Investments, which passed on a recent Security Benefit bond offering.
The insurer’s response is simple: look at our results.
“Security Benefit’s investment portfolio has delivered amongst the best (indeed, potentially the best) investment performance across the U.S. life insurance industry and has performed resiliently during past economic downturns,” Dan Webb, a lawyer for Boehly and his firms, said in a statement. “Security Benefit expects this demonstrated historical superiority will continue well into the future.”
Boehly, 51, a former Guggenheim Partners executive who has risen to fame with his stakes in the Los Angeles Dodgers and Chelsea FC, has also built an insurer with a $7.3 billion book value. His Eldridge Industries is worth about $15 billion.
But his signature as the owner of Security Benefit apparently isn’t enough for all investors. In October, when Security Benefit held a conference call with investors to line up $650 million of fresh cash, some attendees sought more details on the firm’s outsized stakes in structured credit and collateral loans, hoping to get a clearer picture of how these private alternative assets might perform in a downturn.
The pushback reflected concerns making the rounds in the industry and among regulators about pitfalls and potential conflicts of interest in Security Benefit’s portfolio, according to people with knowledge of the matter.
The Kansas Department of Insurance, Security Benefit’s primary regulator, has been under pressure from fellow state watchdogs to take a closer look at the Topeka-based firm’s books, said some of the people, who asked for anonymity to discuss confidential matters.
Last year, the agency conducted a limited scope examination focusing on Security Benefit’s collateral loans, a form of debt secured by an underlying asset, Webb said in the statement. The assessment, which was completed in June this year, didn’t yield any significant findings, according to Webb, who said Security Benefit isn’t aware of doubts about the firm’s investing strategy.
Representatives for the Kansas Department of Insurance and the National Association of Insurance Commissioners, a standard-setting body for the industry, declined to comment.
Still, in a recent credit report, AM Best noted that Security Benefit “maintains high allocations to non-traditional investments and affiliated entities which could strain the company’s performance and capital strength during periods of market stress.”
Security Benefit, Boehly and his firm haven’t been accused of doing anything improper, and Boehly has always been open about using Security Benefit’s capital to finance his sprawling empire.
While the bonds in the recent offering were unsecured and rated just one level away from junk, Security Benefit’s operating companies are rated A- by S&P Global Ratings, implying a “99.95% confidence level” that capital is adequate. Compared with peers, the insurer has well over twice the level of protection per dollar of assets to cover any potential losses, according to Webb.
This story is based on interviews with more than a dozen people with knowledge of Security Benefit, including employees, investors, regulators and competitors.
Collateral Loans
Security Benefit was established in 1892 as a fraternal association after 11 men decided in an East Topeka, Kansas drug store to pool resources and provide financial security in case of a calamity.
Starting with $11, the firm morphed over the following 130 years into one of the country’s main annuity providers, managing more than $50 billion, according to its website. It sells annuities in every state but New York, where operations are handled by a sister company.
Boehly bought Security Benefit in 2010 on behalf of his then-employer Guggenheim Partners, taking on the role of chairman. When Boehly left Guggenheim in 2015, he struck a deal to buy certain assets from the investment firm, including Security Benefit.
Since gaining control in 2017, Boehly has directed an increasing share of the billions that consumers poured into Security Benefit’s annuities products for their retirement to make collateral loans to other entities within his Eldridge Industries empire, based in Greenwich, Connecticut.
Value Debate
In its simplest form, a borrower pledges a specific asset to get a collateral loan. Such debts can draw concern from regulators when related entities act as both the buyer and the seller, according to people familiar with the regulators’ view. This can cast doubt on the asset’s value and the thoroughness of due diligence surrounding the loan’s creation, the people said.
Security Benefit says the loans are negotiated at arms-length, with market interest rates and terms that protect the firm against default, and the interests of both sides are aligned, according to Webb’s statement. If something did go wrong, Boehly’s lawyer said, “nobody loses more from a diminishment in the value of Security Benefit than Eldridge.” Earlier this year, an external expert found the valuation of the underlying assets reasonable, he said.
In their report, AM Best analysts also say that Security Benefit Life has risk management that supports its risk profile.
Boehly’s companies aren’t always immune to the ebbs and flows of economic cycles. At the peak of the coronavirus pandemic, Eldridge-backed NPC International, which operated over 1,200 Pizza Hut restaurants and close to 400 Wendy’s locations, went bankrupt. Eldridge wrote off its equity stake the year before, Boehly said on Bloomberg TV at the time.
Bigger Bets
There’s nothing inherently wrong with holding collateral loans — Kansas doesn’t place any regulatory limits on how much the company can invest — but Security Benefit does it more than its peers. The firm held 63% of the US life insurance industry’s exposure to collateral loans at the end of 2022, according to the most recent regulatory data compiled by the NAIC. Those holdings grew 13% in 2022 for the entire US life insurance industry, while jumping 30% at Security Benefit.
The company’s individual 2023 filings show collateral loans to affiliated entities jumped to $11.8 billion by year-end from just $1.8 billion in 2017 when Boehly took over, and about $790 million was added so far this year. In 2017, the loans represented only 6.8% of the firm’s invested assets; by last year, they totaled more than 25%.
That’s a contrast with Apollo-owned Athene, the model for private equity firms that route holdings to insurance companies they run. Athene’s filings show it didn’t hold any collateral loans last year.
The NAIC has been tightening rules to address the growing influence of private equity on the industry. This includes improving disclosure requirements on collateral loans. Starting with the 2024 filings, insurers must detail the nature of the underlying collateral. One reason was concern about Security Benefit’s exposure to the asset class, some of the people said.
Risk Levels
Security Benefit also has leaned on collateralized loan obligations, or CLOs, which is debt backed by bundles of riskier leveraged loans. At end 2022, the firm had the second-largest exposure of such products among major US life insurers, with $6.1 billion representing 14.2% of its cash and invested assets, according to Moody’s.
“We’ve basically seen a rise in investing for the sake of getting more yield, in privates and CLOs specifically, during a period of relative economic stability,” Monica Parekh, a portfolio manager at American Century Investments, said in an interview. “We’ve never really seen it tested.”
Those securities are indeed more complex and less liquid than broadly syndicated corporate credit, but ultimately less risky, according to Webb. “The defaults seen across structured credit versus the underlying leveraged loan market are significantly lower over time due to structural protection and active management,” he said.
Earlier this year, Security Benefit invested $1.22 billion in a single mortgage mezzanine loan. It’s the largest single loan acquired by a US life insurer in at least 15 years, according to a note by S&P Global Market Intelligence. The debt bears a 13.32% interest rate, a level that reflects much higher risk than typical business loans. Rates on some of its collateral loans ranged as high as 16.9%.
As for Security Benefit’s overall bond holdings, about 43% at the end of 2023 were rated from BBB+ to BBB-, the three lower rungs of investment grade. That’s an improvement from 2019, when more than 68% were in that range. Other US life insurers averaged 35% that year, NAIC figures show.
High Returns
That said, the bets on private credit and riskier products have produced peer-beating returns. Net investment income in the first three quarters of 2024 surged 31% to $2.3 billion, on top of 36% for 2023. Collectively, the US life insurance industry’s net investment income fell 10% that year, according to the data published by the American Council of Life Insurers.
Security Benefit’s fixed income portfolio delivered total returns of 0.6% and 11.1% in 2022 and 2023 respectively, beating the industry benchmark’s -15.8% and 8.5% in those years, according to Webb.
One place where Security Benefit could improve is on transparency, according to some investors, who say its peers do a better job. “They do a lot more investor outreach and a lot more frequent fixed-income calls with investors, which give us a pretty good look at their investment portfolios,” Parekh said.
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