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More and more private credit is ending up on the balance sheets of US life insurers. And there are lots of good reasons for this.
Insurers tend to have less need for the liquidity offered by public market credit, and so private credit offers them a way to cash-in on their (il)liquidity preference, build more diversified, higher-returning portfolios, and better match their liabilities.
Unfortunately, as Alphaville highlighted last week, private credit valuation is a challenge — at least for regulators charged with protecting customers and supervising insurers. Most obviously, private credit lacks a public market. And without public markets, regulators have to rely more on insurers to mark their own homework when it comes to stumping up additional capital to put against future credit losses.
Complicating things further, many US life insurers are owned — or closely connected to — private equity firms. And private credit exposures taken by insurers are sometimes to firms or entities connected to the same private equity firm with whom they are linked.
If this sounds incestuous, and a thing you want to read more about, we wrote a big piece on the whole system-wide shebang last week.
But for some interesting colour on how the rubber hits the road when it comes to single-issuer concentrations across the industry, a new Moody’s report on the US life insurance sector caught our eye.
Looking at sector-wide fixed income holdings, Moody’s analyst Manoj Jethani and team found that four of the top 10 individual borrowers from US insurers had so-called National Association of Insurance Commissioner “private letter ratings” — confidential ratings provided only to the issuer and certain investors.
The NAIC has long been worried about insurers shopping around for private letter ratings, and in the process becoming undercapitalised. Three of the borrowers are affiliated with Apollo. And Athene — the life insurer wholly-owned by Apollo — held the majority of the exposure to each of these three entities:
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Aha! Isn’t this exactly the sort of things that regulators are getting antsy about — the intersection of PE-owned insurers, private credit holdings, opaque private letter ratings, and affiliated assets?
Sure, but look at the rest of the list.
The second and third largest single-issuer credit exposures were to Madison Capital Funding LLC and MM Investments Holdings. These are affiliates of the insurers NY Life and MassMutual, respectively. In each case the affiliated insurers accounted for 100 per cent of system-wide insurance exposure to these borrowers.
And the seventh and eighth largest single-issuer credit exposures were to Lubrizol Corporation and Equitable Holdings Inc. These are affiliates of the mighty Berkshire Hathaway and of Equitable insurance respectively. Each insurer provided over 90 per cent of the credit to their affiliate.
PE-sponsored insurers are getting more and more of the regulatory limelight. But they’re hardly alone in needing to manage the sort of conflicts that come from extending private credit to affiliates.
Moreover, while the IMF has raised concerns that insurers are becoming more reliant on fund managers fessing up and marking down the value of their holdings if and when credit quality deteriorates, we can see that the valuation discipline of public markets might very well be absent if an insurer is pretty much the entire market for said public securities.
