The "next target" of the US private credit crisis: insurance companies investing trillions of dollars
```
The U.S. insurance industry’s exposure to private credit has approached $1 trillion, but the credit rating system supporting this scale is coming under increasing scrutiny.
Last week, the U.S. Treasury announced plans to hold a series of meetings with state insurance regulators, covering topics such as “recent market developments, emerging risks, risk management practices,” and the outlook for the private credit market.
Wallstreetcn notes that the crisis in the private credit market is breaching boundaries and spreading into the broader financial system. The insurance industry, deeply intertwined with private credit, might become the first “domino” to fall in this storm.
According to data from credit rating agency A.M. Best, among the $6 trillion investment assets of U.S. life insurance and annuity companies, nearly $1 trillion has been allocated to private credit, with about $419 billion holding so-called “private ratings.”
Meanwhile, a major report released by the National Association of Insurance Commissioners (NAIC) in 2024 showed systemic overrating in insurance companies' private credit investments. The report was subsequently removed and has not been republished since.
NAIC Report Reveals Overrating, Still Unavailable After Nearly a Year
The core of this regulatory storm is a research report that has now disappeared from public view.
This report, titled “Sustained Increase in Private Ratings of U.S. Insurer Bond Investments, Nearly Tripled in Five Years,” was written by NAIC's Capital Markets Bureau. It revealed systemic overrating issues with private credit investments held by insurance companies.
The research sampled 109 private letter ratings received by NAIC in 2023, all independently assessed by NAIC analysts.
The results showed that 106 private ratings were higher than NAIC’s internal evaluations. In 17 cases, assets NAIC considered junk-rated were rated as investment-grade by several small rating agencies, with some ratings six grades higher than NAIC’s assessment.
However, after the report’s release, NAIC removed it from its official website in May last year, claiming the need to “clarify the research conclusions.” As of now, nearly a year after being taken down, the report has still not been republished.
NAIC stated that the report was removed because it "was based on a limited sample size" and was at risk of being “misinterpreted by the public and media.” NAIC also said it has hired external advisors to help review its use of credit ratings when assessing insurance investment risk.
Small Agencies Give Higher Ratings, Egan-Jones Faces Regulatory Issues
The reliability of rating agencies is becoming an increasingly crucial issue in the ongoing private credit crisis.
About a quarter of the private ratings in the sample came from the three major agencies Moody's, S&P Global, and Fitch, with their ratings averaging two notches higher than NAIC’s internal evaluations.
The remaining ratings were from a number of smaller agencies that emerged after the financial crisis, including Egan-Jones, KBRA, and Morningstar, with their ratings averaging three notches above NAIC’s assessment.
The report identified Fitch as the most frequent large rating provider, and Egan-Jones as the most frequent small provider.
However, Egan-Jones's own compliance record is concerning. The agency has previously been accused by the SEC of conflicts of interest.
Recently, it faces a new SEC probe into its rating practices. Bermuda regulators have ceased to recognize its ratings, and an internal whistleblower has founded a competing agency. The International Monetary Fund (IMF) noted in an October 2023 report:
Reliable private ratings are key to prudent supervision of insurers. It is essential to ensure the soundness of private rating assessments and require sufficient transparency in rating methodologies and reports, to minimize the risk of inflated ratings.
After the report’s publication, some insurers stopped using Egan-Jones’s services.
Regulatory Powers Limited for Years, Reforms Face Obstacles
U.S. insurance companies are regulated by state-level insurance commissioners, who are also responsible for property and health insurance. One of their core duties is to determine whether insurers are maintaining adequate capital buffers, based on the risk level of their investment holdings.
However, this mechanism has obvious weaknesses. State regulators are understaffed and cannot review each investment individually. For most bonds, NAIC’s New York investment team uses public credit ratings to automatically assign risk scores and capital requirements.
Over the past decade, as insurers submitted increasing numbers of private letter rating applications for equal treatment, internal NAIC staff remained uneasy about directly accepting such ratings but lacked formal veto power for a long time.
This situation only partially changed earlier this year. In January, NAIC analysts were formally authorized by state regulators to challenge any private letter rating that was three or more notches above internal evaluation—more than five years after their first request for such authority.
Reform has seen heavy resistance. At a 2023 congressional hearing, eight Republican representatives sent a joint letter to regulators accusing them of overreach.
Ohio Republican Representative Warren Davidson said at the hearing that giving NAIC the power to override private ratings “would reduce transparency, cause greater ambiguity for insurers, and materially harm market efficiency.”
Iowa Insurance Commissioner Doug Ommen stated that commissioners have always had the right to adjust ratings they think are too high. He said:
Regulatory work does not stop in the pursuit of improvement.
Private Credit Penetrates Insurance Industry, Now Exceeds $1 Trillion
This regulatory debate reflects structural changes as private credit has deeply penetrated the U.S. insurance industry in recent years. To understand the issue, it’s important to clarify the unique characteristics of private letter ratings.
Like public bond ratings, private letter ratings are issued by rating agencies hired by issuers or asset packagers, based on the likelihood of borrowers’ repayment.
Investors (including insurers) can also commission agencies to rate their debt holdings. But the key difference is that private letter ratings are only visible to issuers and investors, not the public, making external oversight challenging.
State regulators are understaffed and cannot assess each investment individually. Thus, they rely heavily on NAIC’s New York team to automatically allocate risk scores—and capital requirements—based on public credit ratings.
Over the past decade, insurers began submitting private letter ratings to NAIC, seeking equal treatment for private credit investments. NAIC staff always harbored doubts about directly adopting these ratings, and the above report reflects those concerns.
NAIC claims state insurance regulators “have continuously monitored and responded to changes in insurers' investment portfolios over the years.” However, for a market nearing $1 trillion in assets and inherently lacking transparency, this regulatory chase is far from over.
Risk Warning and DisclaimerThe market involves risk, and investments require caution. This article does not constitute personal investment advice and does not consider the individual investment objectives, financial circumstances, or needs of any user. Users should consider whether any opinion, viewpoint, or conclusion in this article fits their own situation. Invest accordingly at your own risk. ```