The Dodgers Debacle and What it Can Teach Us About Insurance

Insurance and annuities are sold on a single, soothing promise: safety. You hand over your money and in return you get a guarantee, a check that will arrive no matter what, a death benefit your family can count on, or an income stream you can't outlive. It's the financial equivalent of a locked vault. So it's worth paying attention when the vault starts to look less secure than advertised, and a story unfolding right now offers us a rare glimpse inside.

The billionaire owner of the Los Angeles Dodgers and Lakers, Mark Walter, controls two life-insurance and annuity companies, Delaware Life and Clear Spring Life and Annuity. This year, federal prosecutors in Manhattan and the SEC opened investigations into whether those insurers properly disclosed that billions of dollars of their holdings were tied to other parts of Walter's own business empire (including the teams). Two banks have paused selling his companies' products. To be clear, Walter and his businesses have not been charged with any crime, and his holding company insists "there has been no fraud." But charges or not, the episode has pulled back the curtain on how the modern insurance business actually works, and what it reveals should make anyone holding one of these "guaranteed" products ask some tough questions.

What you’re actually buying

Let’s start with the mechanics, because the marketing is designed to obscure them. When you buy an annuity or a whole-life policy, you are not putting money in a vault. You are handing it to a company that turns around and invests it, and your guarantee is only ever as good as that company's ability to pay. The insurer keeps the difference between what its investments earn and what it owes you. That spread is the entire business.

For most of the last century, it was a sleepy, conservative arrangement. Insurers bought safe, boring, easily sold bonds, earned a modest margin, and paid their claims. The guarantee was solid because the assets behind it were solid. That is the world most people still picture when they hear the word "insurance."

That world has changed, and the Mark Walter story is a symptom of the change.

The private credit problem

Over the past two decades, private equity firms and financial conglomerates have bought up life insurers in large numbers, and they've done something specific with them: redirected the money you paid in premiums away from those boring public bonds and into private credit, direct loans and complex debt that don't trade on any public market (see last week’s article).

Why? Because private credit pays higher yields, which fattens that all-important spread. The problem is what you give up for the extra yield. These assets are illiquid, meaning they can't be quickly sold if the insurer suddenly needs cash. They're hard to value, because there's no daily market price, so their worth is often an estimate the company itself has a strong incentive to keep high. And, as the Walter probe highlights, they can be tangled up with other businesses the same owner controls, which raises the uncomfortable question of whether the "independent" assets backing your guarantee are as independent as they appear. Moody's has warned that the ten largest life insurers alone hold more than $350 billion of these private, illiquid bonds, and Senator Elizabeth Warren has pressed insurance regulators about whether anyone is actually watching.

None of this means your annuity is about to evaporate. It just means the "guarantee" now rests on a foundation that is riskier, murkier, and harder to inspect.

When your annuity helps buy a ballclub

This is where the Dodgers drama comes into play. According to a Los Angeles Times breakdown of the deal, more than $1.2 billion of the financing for Walter's purchase of the Dodgers came from insurance companies he controls. And that was a small piece of a much larger pattern: the two insurers had originally reported about $1.4 billion of “related party transactions”, money routed to other businesses in Walter's orbit, but after federal subpoenas prompted an internal review, they restated that figure to more than $17 billion, or nearly 40% of their total invested assets. Delaware Life has since agreed to unwind up to $6.5 billion of those holdings, and Walter has sold the Lakers and is reportedly weighing an exit from the Chelsea soccer club. No one has been charged, and related party deals aren't automatically illegal; the issue is whether policyholders were told that a huge share of the money backing their "guarantees" was tangled up with the same man's trophy assets.

The insurance “safety net”

"But aren't these products insured?" It's the natural question, and the answer, in short, is "sort of." There is a backstop, but it is far weaker than the one protecting your bank account, and the differences are exactly the kind of thing you find out about at the worst possible moment.

If your insurer fails, coverage comes from your state's guaranty association. In most states, annuities are protected only up to $250,000 per person, per insurer, and that's a cap on your total across all annuities with that company, not per contract. If you did the responsible-sounding thing and put $600,000 into annuities with one highly-rated insurer, a chunk of that could be unprotected if the company goes under.

Also, unlike FDIC coverage for bank deposits, which is backed by the federal government and pre-funded, guaranty associations are run state by state and are not pre-funded. The money to pay you is collected from other insurers only after a failure happens, which can mean real delays.

What can I do to protect myself?

None of this is an argument that annuities and life insurance are worthless. A properly chosen annuity can provide a decent return and valuable peace of mind, and life insurance (particularly term life insurance) does essential work for families. The point is narrower and more important: the word "guaranteed" is doing a lot of heavy lifting in the sales pitch, and you owe it to yourself to look at what's underneath it.

That means asking questions the person selling you the product may not volunteer. Who actually owns this insurer, and is it a private equity firm optimizing for yield? How strong are its financial-strength ratings from independent agencies like AM Best and Moody's? How much of its portfolio sits in private, illiquid, hard-to-value assets? And is the amount I'm putting in within my state's guaranty limit?

The bottom line

So what does the Dodgers debacle actually teach us? The most important lesson is that the word "guaranteed" can hide a surprising amount of risky business underneath it: a company investing your money somewhere you can't see, sometimes tangled up in “related party transactions”, and backed by a safety net thinner than most people assume.

That's not a reason to avoid these products. It's a reason to treat "guaranteed" as the start of a conversation rather than the end of one. Ask who you're really handing your money to, what they're doing with it, and what happens if things go wrong.

Disclosure

Convivia Financial LLC is a registered investment advisor. This article is for general informational purposes only and reflects the author's opinions as of the date of publication, which are subject to change without notice. Nothing herein constitutes investment, legal, or tax advice, nor is it a recommendation, offer, or solicitation to buy, sell, or hold any security or insurance product. All investing involves risk, including loss of principal. Guarantees are subject to the claims-paying ability of the issuing insurer. Past performance does not guarantee future results. Information from third-party sources is believed reliable but has not been independently verified. As of the date of publication, the Firm and/or its associated persons do not hold positions in the securities discussed. Registration as an investment advisor does not imply any particular level of skill or training. For more information about the Firm, including fees and conflicts of interest, please refer to our Form ADV Part 2A available upon request.