Speculation has swirled for some time about whether there is a private credit bubble, and if so, how it might burst, and with what damage. A new report from Moody’s Ratings provides evidence that the insurance industry could be the break point.
The ratings agency has found that some US insurers have more than half their fixed income commitments in private credit, which now accounts for around US$685 billion of the insurance industry’s $3.8 trillion total fixed income commitments as of end-2024. This is an asset class that the Financial Times had described earlier this month as being “a ticking time bomb”.
Last month, the International Monetary Fund published the latest global financial stability report which noted that private credit investments of the insurance industry are primarily rated as investment grade.
However, the ratings are mainly from a clutch of smaller rating agencies overseen in the US by the National Association of Insurance Commissioners. There is no federal US insurance industry regulator to match the Securities and Exchange Commission.
The IMF warned that mis-rating might lead to “default losses significantly exceeding those expected during an economic shock”.
According to the Moody’s report, around 10% of private debt held by insurers is of junk grade compared with about 5% for the insurance industry’s overall debt investments.
It also noted that some 43% of private assets held by insurers at the end of last year were concentrated in just ten firms. Security Benefit Life Insurance, owned by investment firm Eldridge Industries, had over 50% of its fixed income investments in private illiquid bonds, while KKR-owned Global Atlantic US had slightly over 25%.
Private credit is a relatively new asset class, less tested even than private equity. Many of the firms that have been eagerly raising funds off the wave of institutional investor enthusiasm are equally untried.
But private credit is a hands-on asset class requiring consistent oversight, far more so than private equity. It’s not clear how many firms have the skills to assess and price the risks adequately.
If the private credit boom does end in a subprime style mis-rating crash, there is now one strong candidate for where that might start.
