30 Aug 2026 3 min read

[Week 35 of 2026] Float

Welcome back to Price and Prejudice with a few musings from Week 35 of 2026.

The Float and the Family

If there's one topic that's dominating financial commentary these days, it's private-equity-owned life insurance. Last year, Bloomberg ran a multi-part series on how Apollo and its peers came for America's annuities. In April, Axios called it the overlooked risk in private credit. More recently, Michael Burry (of the housing bubble fame) pointed his newsletter at it, and the American Prospect argued that the eventual AI-credit bailout is already baked into insurance balance sheets. And now, federal prosecutors are investigating Mark Walter's Guggenheim-linked insurers over billions in undisclosed investments tied to his own business empire, reportedly closer to $20 billion than the $1.4 billion the filings suggested.

So what is the business model, let alone it side effects? The obvious answer, also espoused by the firms themselves, is that it is a replication of Warren Buffett. Berkshire Hathaway's core trick was funding – an insurer collects premiums today and pays claims years later, and in between these timing sits free leverage. The PE version runs the same play with annuities. You can sell fixed annuities that promise, say, 5%, invest the proceeds in private credit yielding 8%, and the spread belongs to the shareholder.

We know the Buffett strategy works because it has been formally decomposed. In a well-known Financial Analysts Journal article, Frazzini, Kabiller, and Pedersen show that Berkshire's Sharpe ratio of 0.79 is explained by leveraging cheap, safe, high-quality stocks about 1.7 to 1, with insurance float supplying roughly 35% of liabilities at an average cost of 1.72%. This is paying less than the risk-free rate (as proxied by the T-bill rate), which is a wonderful business. Under this reading, the PE insurers have simply industrialized the best financing structure in the history of investing.

Recently, though, other hypotheses have emerged. The first is "transfer pricing." In a new paper, authors document that PE-owned insurers do not just buy private credit, they buy it from the family: 60.8% of their structured-security purchases in 2024 were issued by affiliated entities, against 1.7% for other insurers. And when the same security trades on the same day, the PE-owned insurer pays more than independent buyers, with overpayment reaching around 40 basis points in affiliated private placements. Of course, for this story to make sense, you need a reason why a dollar of loss sitting inside the insurer is less painful to the sponsor than a dollar of loss on its own balance sheet. Otherwise moving value from your left pocket to your right pocket, while your left pocket takes the risk, accomplishes nothing.

Another hypothesis is that of "risk shifting." In a forthcoming law review article, authors point out that a failed life insurer does not go through bankruptcy. Instead, state guaranty associations cover policyholders and then assess the surviving insurers, and in most states those assessments are creditable against premium taxes. According to this logic, the backstop that is marketed as industry-funded is largely taxpayer-funded. And since the sponsor's downside inside the insurer is truncated through the insurers, losses in the insurer really end up being cheaper by construction.

It's important to figure out which one is the main force, since each calls for a completely different response. If this is Buffett industrialized, the right response is to leave it alone and let policyholders enjoy the higher annuity rates that competition for float has produced. If it is transfer pricing, the fix is disclosure and arm's-length rules for affiliated transactions, which is likely a job for insurance regulators. And if it's risk shifting, the subsidy sits in the guaranty system itself which likely calls for a larger response. The evidence will eventually sort this out, but the nature of credit is that the sorting happens all at once, usually at the bottom of the cycle.

The Float and the Family

Further Reading