KBRA releases research on recent academic and media commentary regarding the growth of private credit, private equity (PE) ownership of life insurers, the use of private letter ratings (PLR), and the role of state guaranty funds in protecting policyholders. These are legitimate areas for regulatory and market focus. However, the assertion that PE firms categorically use insurers as vehicles for risky private credit origination, excessive fee generation, and unbalanced affiliated investment activity relies on a series of assumptions that extend well beyond the evidence presented. Similarly, the thesis that PE-owned insurers are using private credit to socialize risk through state guaranty funds depends on a chain of inferences that extends well beyond the evidence presented. Private credit exposure is not equivalent to insolvency risk; PLRs are not inherently weaker because they are unpublished; affiliated transactions are not inherently abusive; and guaranty funds are not a standing taxpayer guarantee for private credit losses.
Key Takeaways
- Guaranty funds are last-resort policyholder protection mechanisms, not standing subsidies for asset managers. Treating this framework as a current taxpayer backstop for private credit losses overstates the mechanism unless supported by evidence of likely insolvency, material asset undercapitalization, insufficient reserves, and the potential for meaningful losses to guaranty associations. Importantly, insurance guaranty funds are industry-funded safety nets, primarily funded through post-insolvency assessments on licensed insurers, not through taxpayer appropriations.
- Private credit assets may present greater complexity, lower liquidity, and less public disclosure than broadly syndicated or publicly traded securities, but credit opacity and private-rating status are not evidence of undercapitalized risk transfer. Insurer financial strength depends on a broader set of factors, including liquidity and asset-liability management, investment oversight, reserving practices, risk-based capital, reinsurance structure, group resources, earnings capacity, and management and governance frameworks.
- Assertions regarding the possible negative impacts of private ratings and capital arbitrage should rely on empirical data. By drawing upon unsubstantiated claims from other published and unpublished academic papers, the most recent argument distracts from more constructive stakeholder conversations on this topic.
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Recent Publications
- Private and Public Ratings: Comparable Stability Across KBRA’s Ratings Universe
- Private Credit: Much Ado About Nothing—Perspectives on Columbia Business School Paper About Private Ratings
- Private Credit: A More Balanced Review of the NAIC PLR Review Process for Insurance Balance Sheets
About KBRA
KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.
Doc ID: 1016374
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