A recent study by Columbia Business School researchers has revealed that credit ratings within the burgeoning $1.8 trillion private-credit market systematically downplay investment risk. These "private-letter ratings" are not publicly rated and are a significant focus of the study. This finding raises alarms given the increasing reliance of US life insurance companies on private credit, a trend that has drawn warnings from regulators and analysts about potential risks to policyholders.
More broadly, the financial industry is seeing a growing connection between private equity firms and insurers. Private equity companies, which have acquired or partnered with life insurers and taken over insurance portfolios via affiliated reinsurers, are now pivoting towards private credit. This shift is driven by a decline in traditional funding and banks' reduced willingness to finance leveraged buyouts. While these diversified investments could theoretically bolster insurer resilience, potential losses in private markets could amplify risks across the interconnected insurance landscape.
Private credit holdings among US life and annuity insurers have more than doubled over the last decade, reaching over $1.6 trillion in 2023. This accounts for nearly 20% of the industry's total assets, which stood at about $8.7 trillion at the end of 2023, according to AM Best. The lack of secondary market prices for private credit places the burden on fund managers to disclose credit provisions, making it challenging for regulators and external observers to accurately assess the credit health of insurers' private credit portfolios. The close scrutiny by regulators and investors reflects concerns about how this mix of private credit, collateralized loan obligations (CLOs), and offshore reinsurance will perform during a credit cycle downturn or an event causing increased policy cancellations, potentially challenging the assumption that illiquidity is a safe bet.
