Turmoil in Mark Walter's financial empire is spreading, shaking Wall Street's confidence in one of its most lucrative trades.

A federal investigation of how Walter used life insurers he owned to finance his other businesses has drawn greater scrutiny to the now-common practice among fund managers of snapping up insurance companies so they can invest the insurers' huge troves of policyholder money.

That is raising doubts about the planned $4.1 billion purchase of life insurer Brighthouse Financial by Aquarian Holdings, an investment firm run by Rudy Sahay, a former executive at Guggenheim Partners, one of Walter's companies. Brighthouse's share price has dropped about 20% since late July, when the Walter investigation was reported, reflecting investor skepticism that the deal will go through, analysts said.

"In one sense, [Walter] is an isolated case but in another it brings attention to how insurance companies have been investing much more in private securities," said Peter Troisi, an analyst at Barclays. "The question is: 'Is this a sign of there being too much risk and will there be fallout from that?'"

Brighthouse's insurance business is based in Delaware, the state that also regulates the two Walter insurance companies under investigation, Delaware Life and Clear Spring Life and Annuity. The two insurers found about $20 billion of investments related to his other companies hadn't been properly disclosed, and prosecutors and the Securities and Exchange Commission are investigating if Walter committed fraud by concealing the connections.

Walter's conglomerate, TWG Global, has said the firm "always acted in good faith, and insinuations that we have in any way attempted to circumvent our obligations is simply false."

The Delaware insurance regulator said it was getting so many questions about the Brighthouse deal it decided to take the unusual step of issuing a statement about its review. The statement sent Brighthouse's stock falling even further as investors worried the deal would be blocked.

Delaware said there wasn't anything unusual in its review. "Protecting policyholders remains paramount in every decision, every exam, and every effort of my department," Delaware insurance commissioner Trinidad Navarro said in a statement.

Some hedge funds have been placing bets on the deal falling apart as they expect Delaware to impose conditions that would make Aquarian balk.

"This deal hangs on what Delaware decides to do with it and that is making people edgy," said Wilma Burdis, an analyst at Raymond James. About 140 of the investment bank's clients attended a conference call it organized about the Brighthouse transaction last week, she said.

Aquarian has no business relationship with Walter's companies or the loans under investigation, and its main priority is fulfilling commitments to policyholders, a spokesman for Aquarian said. "Rudy Sahay worked at Guggenheim nearly 12 years ago...and left of his own volition to pursue a different business model at Aquarian," he said.

Brighthouse declined to comment.

Apollo Global Management kick-started the technique of using insurers to boost investments in 2009, when it co-founded insurer Athene, eventually becoming the top seller of annuities in the U.S. Walter and others copied the idea, betting they could invest the capital for more than they had to pay policyholders, pocketing the difference and fees they collected for managing the money.

Firms that took over insurers often managed private-credit funds and invested policyholders' cash in high-yielding loans they made to companies and consumers. Most have done so without incident but an insurer owned by Golden Gate Capital was put into liquidation by Connecticut regulators in January after its reinsurance deals backfired.

Laws governing the insurance industry are made and enforced by states. The National Association of Insurance Commissioners, a group that includes the top insurance official from every state, has responded to increasing private-fund ownership with tighter investment disclosure guidelines and other measures.

Delaware's regulatory efforts have adapted to changes in the insurance industry, including the increasing takeover by private asset managers, Navarro said.

By some measures, Aquarian's deal for Brighthouse always had risks.

Fitch Ratings lowered its rating of Brighthouse when the deal was announced, citing a high risk of large payouts on the insurer's existing policies and the potential that Aquarian would add even more risky investments to the insurer's portfolio. Three other credit-rating firms put Brighthouse on review for potential downgrades.

Sahay launched Aquarian in 2017 and raised money from private-equity firms including RedBird Capital and from Mubadala Capital, an investment firm operated by United Arab Emirates's sovereign-wealth fund that has also announced a partnership with Walter. The three insurers Aquarian already owns and the funds it manages control about $27 billion, making Brighthouse's $131 billion in assets a transformative prize.

The deal has another draw for Aquarian. Delaware permits insurers to form "captive" reinsurance companies, which can strike deals with the main insurer to take on some risk, often enabling the companies to hold less capital to protect against losses.

Brighthouse said in a recent SEC filing that maintaining a captive reinsurer allows more flexibility in its portfolio and operations. Brighthouse has also said that Aquarian could call off the merger if regulators require changes to Brighthouse's captive reinsurer.

The capital at Brighthouse's captive reinsurance unit "looks low relative to investment risk," Keefe, Bruyette & Woods analysts wrote in June, adding the clause about potential changes contributes to the deal's "above average risk."

Aquarian also could walk away from the deal if regulators require the company to inject significantly more capital into Brighthouse than Aquarian was planning, the filing said.

Aquarian is proposing to use financing from Mubadala Capital and the Royal Bank of Canada in the Brighthouse deal. That capital helped Aquarian top the next closest bid by $1 billion, but could increase Aquarian's financial burden. The financing costs would be offset by servicing and investment management fees charged to Brighthouse.

"Aquarian will charge market-rate fees for services intended to enhance Brighthouse's value over time," the Aquarian spokesman said.