The senior executive at one of the world’s biggest private capital firms was shocked.
Aquarian, a little-known investor looking to swallow one of the few US life insurers that remained outside private capital control, had laid out its vision for the business.
The executive did not like what he saw.
Started as a private equity fund in 2017, Aquarian was proposing to take the playbook of juggernauts such as Apollo Global, Blackstone and KKR — using life insurance to fund lending and profiting from the difference — and put it on steroids.
The target was Brighthouse Financial, a troubled life insurer with more than $230bn in promises to policyholders and other liabilities. Groups such as Apollo and Carlyle had left the sale process after taking stock of its challenges and Aquarian wanted additional investment to close the deal.
“Everybody who saw that [presentation] was horrified,” the executive said.
Aquarian sealed the deal for Brighthouse at $4.1bn in November, baffling other asset managers that had independently come up with valuations worth roughly half that.
Senior figures in private capital and insurance are increasingly concerned that latecomers are pushing into ever more risky assets to win market share, fuelling a boom in private credit and threatening consequences that could spoil the party for everyone.
Regulators, meanwhile, fret that newcomers and more established operators alike are introducing risks to the financial system that are poorly quantified and ill understood. These risks are now in the spotlight, as cracks emerge in the sprawling private credit market, with investors dumping shares in groups from Ares and Blue Owl to KKR and Apollo.
The executive who reviewed Aquarian’s plans added: “People are nervous, and I think they’re right to be.”
Over the past decade, Apollo and its rivals have remade the multitrillion-dollar life insurance sector in their image. Alternative asset managers have loaded up both in-house and independent insurers with private credit investments, devising ever more complex ways to bundle loans.
That has helped them to feed insurance clients riskier investments — including ones they have originated — at higher leverage ratios than they would otherwise be permitted to hold.
This trade started small. But as the strategy boosted returns, it allowed private capital-owned insurers such as Athene and Global Atlantic to undercut rivals on price, handing them more and more market share.
Athene, which Apollo brought fully under its control in 2022, has been the US’s top seller of annuity products for two years running. Sleepier publicly owned and mutual insurers have moved to copy the approach, raising concerns about new vulnerabilities.
“Everybody’s focused on the big boys, but the problems often come from the second-tier players,” a former top MetLife executive told the FT. “When the music stops, they’re the ones that go under.”
Older insurance houses such as MassMutual are now big holders of private illiquid bonds and related investments, which have attracted scrutiny over their opacity, pricing and potential conflicts of interest.
Watchdogs are worried that the private credit playbook has become standard practice and the risks building up in insurance could destabilise the financial system.
“We have less visibility into what is securitised in these structures, and that makes it very hard for us to evaluate the risks,” said Ralf Meisenzahl, a financial researcher at the Federal Reserve Bank of Chicago who has studied the systemic risks of private credit in the life insurance sector.
“Are they super-risky or not? We honestly don’t know,” he added of life insurers’ holdings of private placements. However, he said, “this lending is more opaque” compared to prior investment cycles, making it “very hard . . . to guess what the performance through the credit cycle might be”.
At the heart of regulators’ fears is a concern that market mechanisms for pricing assets — and ensuring insurers hold adequate capital — have broken down.
Large life insurers turned to private credit after the financial crisis, as the zero interest rate era pushed them to search for more exotic assets to help meet their obligations to policyholders.
Over the next 15 years, those investments exploded. But economists, financial stability bodies and rating agencies have increasingly questioned whether these assets could be overvalued.
Asset managers “express a lot of confidence in how the assets have been underwritten”, said Tim Zawacki, an insurance analyst at S&P. “But for those private assets where trading activity is minimal or doesn’t exist, we’re sort of operating on trust.”
Private long-term loans are not inherently risky. Indeed, the life insurance industry is well placed to make illiquid investments and capitalise on their higher returns given its longer investment horizons.
But the boom in private credit has prompted concerns that insurers may have taken on too much risk at overly optimistic prices.
Moody’s estimated that US life insurers’ holdings of a riskier subcategory of assets had grown to $685bn by the end of 2024, or about 18 per cent of the industry’s $3.8tn in fixed-income holdings.
That figure includes so-called Level 3 assets — a category of illiquid asset that lacks reliable market pricing — as well as investments whose ratings are private or lack a formal rating from a rating agency.
The bonds in this category were not only less transparent and less frequently traded, Moody’s found, they also came from weaker borrowers.
Level 3 assets made up 36 per cent of Athene’s total assets in the third quarter of 2025, up from 12 per cent at the start of 2021. At Global Atlantic, KKR’s insurer, Level 3 assets rose to 30 per cent in the third quarter of last year, up from 10 per cent at the start of 2021.
Insurers gobbling up such assets could be storing up funding shortfalls that only materialise years later.
“My concern is that there would be ways to hide losses or push off the accounting of underperformance and make everything look great today,” the head life actuary for a US state insurance regulator told the FT.
Adding to regulators’ concerns, many of the loans in KKR and Apollo’s insurers come from other parts of these sprawling businesses. About a fifth of investments by Athene’s US Life Group and by Global Atlantic now come from affiliates, according to rating agency AM Best.
These affiliated investments have attracted scrutiny because of concerns that insurers may be less rigorous in their vetting of risk and pricing when the assets come from a parent.
Apollo argues that its interests are aligned with those of its insurer, since it would be on the hook for policyholder losses. “Athene has access to directly originated investment-grade credit that generates consistent yield outperformance, delivering better outcomes for policyholders,” Athene said.
There are also concerns that insurers could be used as buyers for embattled assets originated by private capital affiliates during periods of strain.
When private credit group Blue Owl recently came under pressure to return cash to investors in one of its funds, it found a buyer for some of its loans in its insurance affiliate Kuvare, according to people familiar with the deals.
Where Global Atlantic and Athene have ventured, others have followed. Over the 10 years to 2024, US life insurers’ holdings of Level 3 assets as a percentage of their bond investments doubled, research by S&P showed.
Among the largest investors in these assets were Security Benefit and Everly, insurers controlled by billionaire sports investor Todd Boehly — a former colleague of the Aquarian founder at investment group Guggenheim.
But traditional mutual and public insurers have piled into these investments too, S&P’s analysis of statutory filings showed.
That analysis found that Allianz Life had almost a third of its bond holdings in Level 3 assets by 2024.
At Prudential Legacy of New Jersey, a subsidiary of Prudential Financial, that figure was 65 per cent, up from almost no Level 3 assets a decade earlier.
And century-old insurance house MassMutual had almost half of its $166bn in bonds in Level 3 assets in the third quarter of last year, up from a third in 2014.
Concern about the illiquid nature of these assets is exacerbated by doubts over how robustly their creditworthiness is being assessed.
Top investment-grade ratings matter for insurers since those scores determine their capital requirements.
But the Federal Reserve and the Bank for International Settlements, which advises central banks, have warned about arbitrage and ratings shopping — in which insurers or bond issuers seek out more favourable ratings or obtain them through clever structuring that fails to reflect the true risk.
Even the National Association of Insurance Commissioners, an industry body, has long recognised that the system is being gamed by the use of structures like collateralised loan obligations.
Amplifying the problem is that ratings on private credit investments are often kept private and assigned by a single rating agency rather than multiple independent analyses.
Apollo has argued that the use of private letter ratings provided by smaller, specialist outfits — rather than public ratings — was driven by concerns over “confidentiality, not credit quality”.
But analysts at JPMorgan have said that privately rated investments were “inherently more risky”. “There is no way to know anything about credit quality of the underlying investments,” the bank wrote last year.
The US life insurance market is already packed with private capital investors, but new entrants continue to flood in.
Hedge fund investors Bill Ackman and Dan Loeb have muscled into the insurance business while Oaktree, the distressed and credit markets investor majority owned by asset manager Brookfield, in December announced the acquisition of a small Iowa-based insurer.
“It’s getting a bit late in the game and it’s a crowded market,” S&P’s Zawacki said. “How does a company grow its balance sheet in such an aggressive landscape? Aggressive pricing, aggressive product design.”
If Aquarian chief executive Rudy Sahay finalises his takeover of Brighthouse, it will put the Guggenheim veteran in league with ex-colleagues Boehly and Mark Walter as the new owner of one of the US’s largest life insurers, with billions that could be reinvested into more exotic and high-yielding investments. (Sahay declined to comment for this article.)
But the takeover would represent one of the most aggressive applications of the playbook yet.
Brighthouse was the insurance equivalent of a “bad bank”, spun out of MetLife in 2017. One private capital investor who explored a takeover of Brighthouse described its liabilities as “un-hedgeable”.
Unlike Athene, which sells primarily fixed-indexed annuities, Brighthouse has specialised in variable annuities, whose embedded guarantees made the products harder to pool, hedge and reinvest into the kinds of assets where private capital giants have earned surplus returns.
Aquarian’s expectations were in line with returns it had achieved in other insurance subsidiaries, said one person familiar with its plans, and it was not counting on variable annuity products being shifted into any specific asset classes.
But the executive who reviewed its presentation described “unnerving” assumptions about how the portfolio could be shifted into private and illiquid structures.
Meanwhile, insurers’ private credit binge shows no signs of stopping.
AM Best analyst Jason Hopper said the ratings group had asked insurers whether they had hit their maximum allocation to private credit or “how much higher can they go?”
The response: “We don’t have that answer yet.”
