Los Angeles Dodgers Owner’s Troubles Roil Insurance World

The investment office of an insurance company used to be one of the more boring departments in finance, focused on putting customers’ premiums into ho-hum ***ets like bonds.

But over the past two decades, this onetime backwater has become an engine of enormous wealth, as private equity firms have acquired insurers en m***e and redirected those premiums into their own risky investments.

Now, the wisdom of that approach is in the spotlight as one of its biggest stars, Mark Walter, faces a financial reckoning during a federal investigation into whether some of his companies improperly characterized tens of billions of dollars in ***ets.

Mr. Walter, 66, might be Exhibit A in the how-to manual for transforming insurance money into private fortune, steering a modest ***et manager, Guggenheim, to acquire a string of insurers in the years after the 2008 financial crisis. He then oversaw the sale of many of those insurers to his personal investment firm.

He used billions of dollars of premiums to buy sports teams, including the Los Angeles Dodgers, the Los Angeles Lakers and the Cadillac Formula 1 team, as well as real estate debt. And he made loans to companies as varied as Carvana and Wendy’s.

But over the past few weeks, Mr. Walter has scrambled to sell some of those ***ets to shore up his insurance empire. His surprise deal this month to sell a majority stake in the Lakers, after owning the team for only a year, signaled the depth of his woes.

Mr. Walter, who declined to be interviewed, has not been charged with a crime. His representatives say he is cooperating with the authorities.

His situation has raised alarms across the nation’s insurance industry, where private-equity giants like Mr. Walter owned about $1.1 trillion in life insurance ***ets last year, according to AM Best, a credit rating firm. That was up from nearly none in 2012, the year the firm started tracking such data.

Lawrence J. Rybka, chairman of Valmark Financial Group, which sells life insurance in more than 30 states, has instructed his employees to avoid placing policies connected to Mr. Walter’s empire or any other private-equity-connected insurer, fearful that such insurers could run out of money needed to make payouts.

“Like many problems, this just gets bigger and bigger until it breaks,” Mr. Rybka said.

Premiums from insurance policies have long been invested in straightforward areas like stocks, real estate and highly rated corporate bonds — the idea being that money would always be available to pay out claims.

After the financial crisis, private equity saw an opportunity to acquire insurance companies as a source of funds under their control to make investments.

Unlike banks, which must adhere to stringent federal regulation, the insurance industry is subject to a patchwork of regulations, with a separate overseer in each of the 50 states levying its own rules.

And unlike bank accounts, insurers have no federal backstop. When they fail, many states bail them out by raising money from other insurers, though there is often a cap on individual payouts.

Their investments, however, can be nearly impossible for a layperson to follow.

An organizational chart in a regulatory filing for Delaware Life, one of the insurers that Mr. Walter’s conglomerate owns, publicly lists about 150 related entities. Mr. Walter himself is at the top of the list. Some operate out of the same office addresses.

“There are always ways to game the rules,” said Alton Cogert, president of Strategic Asset Alliance, an insurance investment consultancy. “If you have multiple companies and there is money moving around left and right, it’s hard for anybody to make full sense of it.”

Mr. Walter’s trouble burst into view in June when Delaware Life and Clear Spring Life, another insurer he owns, disclosed that they had miscl***ified a collective $21 billion in investments as being independent. In reality, the premiums were invested in companies that were intertwined with Mr. Walter and his business empire.

Regulators view investments in affiliated companies as riskier because the deals lack independence and invite conflicts of interest. They can also lead to trouble if an insurer needs money quickly to pay out claims, as any ***et sales would adversely affect both the insurer and its parent.

While some affiliated investments are permitted, regulators limit their amount and require that the vast majority of an insurers’ investments be independent. Insurers are also required to detail how much of their portfolio is tied to their owners.

Delaware Life disclosed that federal prosecutors in New York had opened an investigation. The Securities and Exchange Commission is also investigating.

Prosecutors are trying to determine whether Mr. Walter’s insurance firms deliberately concealed from regulators the billions of dollars in loans they had received or made to companies he had ties to, three people briefed on the investigation said.

Some of his subsidiaries borrowed money from one part of the empire while lending to other parts, public filings show.

Prosecutors have issued grand jury subpoenas, and federal agents seized Mr. Walter’s phone and laptop computer, a person with knowledge of the investigation said.

A spokesman for Jamie McDonald, U.S. attorney for the Southern District of New York, who is leading the federal investigation, declined to comment.

TWG Global, Mr. Walter’s personal investment firm, said in an unsigned statement last week that its “insurance companies’ capital positions and liquidity remain strong.”

But the ripple effects around Mr. Walter are spreading.

On Aug. 16, Hunterbrook Media published a report suggesting that Guggenheim, where Mr. Walter is chief executive, had closer-than-admitted ties to another giant insurer, Sammons Financial. Hunterbrook, which sells its reporting to Hunterbrook Capital, an affiliated firm, said it was shorting, or betting against, Sammons’s debt as a result.

Sammons has more than $147 billion in ***ets to underwrite more than 1.7 million life, health and annuity policies under brands such as Midland National.

The Hunterbrook report, citing public filings, said Sammons had misidentified billions of dollars of Guggenheim-managed investments as unaffiliated, even though Sammons owned part of Guggenheim. Some of those investments were channeled into Mr. Walter’s personal holdings, including ownership of a bull-riding team.

Sammons’s publicly traded bonds promptly dropped. Sammons Financial subsequently said in a statement that its parent company, Sammons Enterprises, held “a nonvoting and noncontrolling, minority interest” in Guggenheim that it had been “divesting over the past several years.”

Kevin Waetke, a spokesman for Sammons Financial, declined to answer questions about the size of that ownership. But he said the company’s disclosures abided by all applicable regulations.

A spokesman for Guggenheim declined to comment.

Last week, TWG Global said it had swapped $6.5 billion of affiliated ***ets at Delaware Life for an equal amount of unaffiliated ***ets.

Much of what Mr. Walter owns is said to be for up for sale, according to three people in conversations with the firm about potential transactions, including his stake in Chelsea F.C., a Premier League soccer team. He hasn’t said whether he will sell the Dodgers, though on Thursday his representatives took the unusual step of specifying that he wouldn’t sell any part of his Formula 1 ventures.

Any resolution to Mr. Walter’s troubles could be months or years away. Delaware Life, for one, has said it will take until the end of the year to come up with a “remediation” plan for its finances.