Key Takeaways:
A quarter of life insurers that hold stakes in private-credit funds also lend to them, creating a double exposure that regulators warn could amplify losses during market stress.
About one-quarter of the life insurers tracked by Clearwater Analytics that own shares in private-credit funds also lend money to those same funds, according to a new report from the portfolio-management software provider. The insurers typically lend $2 to the funds for each dollar of shares they hold, amplifying potential returns but also increasing risk.
"The equity in a fund and also the debt provider — that increases the threat of cross-contamination," Matthew Vegari, head of research at Clearwater Analytics, said.
Based on Clearwater's findings, the Wall Street Journal calculated that life insurers industrywide lent about $24 billion to private-credit funds in which they owned stakes valued at roughly $12 billion. The estimates exclude property and casualty insurers and health insurers, which also have double exposure. Clearwater doesn't track most very large insurers, which are more likely to lend to private-credit funds, meaning actual lending could be higher.
The median insurer that Clearwater tracks now invests 9% of its money in private credit, up from about 5% at the start of 2019. Private credit has grown beyond its traditional focus on loans to riskier companies to include mortgage debt and bonds backed by heavy machinery or intellectual property. Insurers are natural buyers of these hard-to-trade investments because they can lock up policyholder premiums for years without worrying about payouts.
Regulatory Scrutiny Intensifies
The Financial Stability Board, a global organization of financial regulators, warned in May that growing interconnections between insurers and private-credit funds can "lead to difficult-to-detect pockets of risks." The FSB said this "layering effect may amplify losses during market stress."
The disclosures insurers make to the National Association of Insurance Commissioners can include thousands of individual investments in different documents, making it difficult to identify when they own shares and debt of the same private-credit fund. The NAIC said in a statement that insurance regulators have access to information "including limited partnerships and lending activities."
Many private fund managers, including Apollo Global Management and KKR, now own life-insurance companies, which in turn have become big investors in private credit. The insurance industry is regulated by a patchwork of state agencies that are struggling to keep up with the rapid expansion.
What This Means for Investors
The double exposure structure means insurers earn income from their shares and interest on their loans to the funds, but can take deeper losses if enough loans in the fund default at once. Investors have grown increasingly worried about rising defaults among the riskier loans that private-credit funds often make. Clearwater doesn't see signs of systemic financial risk, Vegari said, though he noted the increased concentration is ironic given that private funds often market themselves as providing diversification. The next catalyst for the sector will be how state insurance regulators respond to the FSB's warnings and whether they impose tighter capital requirements on insurers with concentrated private-credit exposure.
This article is for informational purposes only and does not constitute investment advice.
