Thomas Gober: Is Your Life Insurer Solvent?

In this issue of The Institutional Risk Analyst, we feature a guest post by Thomas Gober, a certified fraud examiner (CFE) and the founder and president of Thomas Gober Forensic Accounting Services. A former Mississippi Insurance Department examiner, his primary career focus for the past 40 years has been examinations and investigations of complex accounting fraud schemes in the insurance industry's financial reporting.

Viva La Enron: Razor-Thin Surplus or Massive Deficit?

By Thomas Gober

July 31, 2026 | Large private credit/equity firms have taken control of many life and annuity insurers over the past decade, transforming them into higher risk, less transparent insurers. For the  record, most of the for-profit insurers are also higher-risk, less transparent entities; but generally, not as extreme as the carriers controlled by private credit and private equity sponsors.

Mainstream financial media increasingly warn that many of today’s private credit, private equity and commercial mortgage-backed securities are likely overvalued, illiquid and have overly optimistic ratings. Prominent investors portrayed in the film "The Big Short"—specifically Steve Eisman and Michael Burry—have recently issued warnings regarding private equity-backed life insurance companies and their heavy exposure to private credit.

But as worrisome as overvaluation of assets may be, there is another danger lurking on the liabilities side: $1.3 trillion of affiliated “reinsurance” concentrated in just 40 carriers. As of December 31, 2025, the roughly 700 U.S. life and annuity carriers (L&A) reported  combined assets of about $10 trillion. After deducting total liabilities, their combined  capital surplus was $658 billion. Insurers are not allowed to go negative in terms of capital surplus. This makes surplus critical; it is the only buffer between solvency and insolvency. 

On the surface, liabilities are fairly easy to understand. For L&A carriers, their liabilities  are basically long-term promises: future death claims and annuity payouts. Very capable  actuaries make those calculations based on mathematics and probability factors. If their  calculations are accurate, that should mean there are no adjustments necessary on the  liabilities side of the balance sheet. 

This is where reinsurance can enter the picture. Insurance companies may purchase insurance protection known as reinsurance; a way for an insurance company to spread its  risks. The ceding company will cede (transfer) a block of business to another company, the reinsurer.

As an example, the insurer may cede a block of business that equals $10 billion in  liabilities. But for the transaction to be legitimate, they must also move $10 billion in assets, commensurate with the liabilities. In this way, insurers spread their risks but otherwise surplus is not really impacted. This  traditional form of genuine risk transfer reinsurance is not only legitimate, but it makes the  world go round when it comes to insuring risk.

Recently though, we’ve seen a rise in affiliated reinsurance. An insurance company or  parent will form its own in-house reinsurance company and do the reinsurance with itself. As of December 31, 2025, there is a total of $1.5 trillion in-house affiliated reinsurance. Of  the 700-U.S. L&A insurers, less than 200 are engaging in this practice and most of them are  doing it only minimally. That’s the good news.

The bad news is that if we pare the list down to only the top 40 users, they still account for $1.3 trillion of in-house, affiliated reinsurance. If you’re thinking that’s an awfully big number for only forty insurance carriers, you would be correct. No matter how you look at it, that’s a hefty amount of sleight-of-hand – and not compliant with the statutes in any of the 51 insurance regulatory jurisdictions in the United States.

When a company does these deals with itself (related party transactions) there are two clear requirements. First: The transaction must be “fair and reasonable”. In other words, the transaction must be handled as if it were with a sophisticated and informed independent entity. So, if you offload $10 billion of liabilities with an independent reinsurer, they’ll  require that you also send $10 billion in assets.

The second requirement is transparency. To guarantee that these transactions are fair  and reasonable, they must be transparent. We must be able to see both ends of the  transaction. The National Association of Insurance Commissioners (NAIC) and all 50 states plus Puerto Rico mandate this. We must impose “fair and reasonable” on related parties; therefore, we must see both ends of the transaction. The  statutes require:

Material transactions by insurers with affiliates must be on (a) terms that are “fair  and reasonable” and (e) “The books, accounts and records of each party to all such transactions shall be so maintained as to clearly and accurately disclose the nature  and details of the transactions.” 

The problem with this type of “captive” reinsurance is that we can’t see the other end, the asset part of the transaction, at all. These 40 U.S. companies are ceding this $1.3 trillion to affiliated reinsurers in “secrecy  jurisdictions.” These may include captive reinsurers in Vermont, Delaware, Iowa or Arizona in the U.S. Offshore venues include Bermuda, Barbados, and the Cayman Islands. 

The U.S. states who have embraced secrecy boast that their financial records cannot even be made available by subpoena. Our professional opinion is that these black box deals are prohibited by law even though state insurance regulators often turn their heads and allow it.

What does it mean when the insurance regulators in most states ignore clear conflicts of interest and allow large insurers to reinsure their own risks? It means we have forty insurance companies with high concentrations of internal, opaque, captive and offshore reinsurance to the tune of $1.3 trillion. These same 40 carriers have only $182 billion in combined surplus. If just 20 percent of the reinsurance recoverables from these black box deals turn out to be uncollectible, these 40 carriers are insolvent. See the list below of the 40 carriers’ surplus & affiliated reinsurance.

Source: NAIC

Suppose you’re the CEO of a for-profit insurer, and you have stockholders who expect dividends. They want more dividends each year. You need a larger surplus to meet that  demand. You can enlarge the surplus with fresh earnings or new paid-in capital, but it’s  much less expensive and faster to create a captive reinsurer who will assume $10 billion in  liabilities from you but, thanks to conflicted management and more flexible capital requirements in its jurisdiction, ask for only $5 billion in assets to back them. Instantly, poof, you add $5 billion to your surplus and your hungry stockholders get fed. How easy is that?  Way too easy.

The sad part of this story is that using a reinsurer in an honest and reasonable fashion is already a huge financial advantage and helps the US firms grow their capital surplus much faster. But that is apparently not enough for the executives of some dishonest carriers.

The conflicted math that makes offshore reinsurance attractive to US insurers is why affiliated reinsurance ceded into secrecy jurisdictions is a great concern. Private credit and commercial mortgage-backed securities are also worrisome. But at least we can see assets and have their values re-assessed. But “black box” affiliated reinsurance is complex, arcane and impossible to confirm.

As stated before, state insurance statutes require  transparency. Nonetheless, this industry has more than $1.5 trillion of opaque, secret, captive reinsurance transactions that are hidden from state and federal regulators. Our research shows that the lion’s share of the black box deals are done by only 40 carriers. Since these affiliated reinsurers do not file public statutory annual  statements, we don’t know how underfunded they may be.

The first image below shows the affiliated reinsurance and surplus of all 700+ US L&A carriers.  The 2^nd image reflects just the top 40 L&A carriers:

Source: NAIC

Source: NAIC

Note: All data related to reinsurance in the above images are taken from the December 31, 2025, statutory  annual statements, Sch. S, Part 3, Section 1, col. 9 Reserve Credit and col. 14, Modified Coinsurance (ModCo).

Whenever we’ve had an opportunity to peer into these black boxes—when an insurer posts them by accident or when an insolvent life insurer’s books are examined--the liabilities are found to be dramatically underfunded. One insurer went so far as to fund only 5% of its liabilities with real assets. Perhaps that’s why state regulators and the industry are  so secretive. They don’t want us to know how big the hole is or how overvalued certain “assets” are compared to the true cash value. 

When a large private credit firm takes your money for an annuity or surplus note, then hides it offshore and says, “Trust me it’s fine,” chances are it’s anything but fine.

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