The "next target" of the U.S. private credit crisis: insurance companies investing trillions of dollars

The U.S. insurance industry’s exposure to private credit has nearly reached $1 trillion, and the credit rating framework that supports this scale is facing growing scrutiny.

Last week, the U.S. Department of the Treasury announced that it plans to hold a series of meetings with state-level insurance regulators. The agenda will cover “recent market dynamics, emerging risks, and risk management practices,” as well as the outlook for the private credit market.

Wall Street Insights noted that the crisis in the private credit market is breaking out of its boundaries and spreading into the broader financial system. Meanwhile, the insurance industry—deeply intertwined with private credit—may become the “first domino” to fall in this round of turmoil.

According to data from credit rating agency A.M. Best, reported previously, among about $6 trillion in invested assets held by U.S. life insurance and annuity companies, nearly $1 trillion has been allocated to private credit, including about $419 billion in so-called “private ratings.”

At the same time, a major report released by the National Association of Insurance Commissioners (NAIC) in 2024 showed that ratings for private credit investments by insurance companies were systematically inflated. The report was later taken down and, to date, has not been re-published.

NAIC report reveals inflated ratings; taken down for nearly a year and still not back

At the core of this regulatory controversy is a research report that has now disappeared from public view.

The report, written by the NAIC Capital Markets Unit and titled “The Continued Climb of Private Ratings in Bond Investments by U.S. Insurers, Nearly Tripling in Five Years,” reveals a systematic issue of rating inflation in private credit investments held by insurance companies.

The research extracted 109 private credit letter-ratings received by the NAIC in 2023. These assets were all independently scored by NAIC analysts.

The results show that 106 of the private ratings were higher than the NAIC’s internal assessment results. In 17 cases, the NAIC judged the assets to be junk-grade, while several small rating firms rated them as investment-grade. Some ratings were even as much as six notches higher than the NAIC’s assessments.

However, after the report was published, in May last year the NAIC removed it from its official website, claiming it needed to “clarify the research conclusions.” Nearly a year has passed since the report was taken down, and it still has not been re-published.

The NAIC said the report was taken down because it was “based on limited sample data” and carried a “risk of being misread by the public and the media.” The NAIC also stated that it has hired external consultants to help review how it uses credit ratings when assessing investment risks for insurers.

Small rating firms command higher premiums; Egan-Jones caught in the regulatory storm

In this private credit crisis, the reliability of rating agencies is becoming an increasingly critical variable.

Among the private rating samples studied, about one-quarter came from three large firms—Moody’s, S&P Global, and Fitch—whose ratings, on average, were about two notches higher than the NAIC’s internal assessments.

The remaining ratings came from a batch of smaller rating companies that rose after the financial crisis, including Egan-Jones, KBRA, and Morningstar. Their ratings, on average, were about three notches higher than the NAIC’s judgments.

The report identifies Fitch as the most frequent provider of large ratings, while Egan-Jones is the most frequent provider of small ratings.

However, Egan-Jones’s own compliance record is not reassuring. The firm had previously been accused by the U.S. Securities and Exchange Commission (SEC) over conflicts of interest.

It now faces another round of SEC scrutiny into its rating practices. At the same time, regulators in Bermuda no longer recognize its rating credentials, and an internal whistleblower has since launched a competing ratings agency. The International Monetary Fund (IMF) said in a report last October that:

Reliable private ratings are key to the prudent supervision of insurers. It is necessary to ensure the robustness of private rating assessments and require that rating methodologies and reports have sufficient transparency, to minimize the risk of inflated ratings.

After the report was released, some insurance companies stopped using Egan-Jones’s services.

Regulatory authority constrained for years; reform faces heavy resistance

Insurance companies in the U.S. are regulated by state insurance regulators, whose responsibilities also cover property and casualty insurance and health insurance. One of the commissioners’ core duties is to assess whether insurers maintain adequate capital buffers based on the risk level of the investments they hold.

However, this mechanism has clear shortcomings. State regulators are understaffed and cannot review every single investment one by one. For most bonds, the NAIC New York investment team automatically assigns risk scores—and corresponding capital requirements—based on publicly available credit ratings.

Over the past decade, as insurance companies increasingly submitted private credit letter-rating applications for treatment on an equal basis, NAIC staff have continued to harbor concerns about directly adopting private ratings, yet they lacked formal authority to raise objections for a long time.

This situation began to change only at the beginning of this year. In January, NAIC analysts formally received authorization from state regulators to object to private credit letter-ratings that were three or more notches higher than the internal assessment level—more than five years after they first made that request.

Reform has faced heavy resistance. At a U.S. congressional hearing in 2023, eight Republican members jointly sent a letter to regulators, accusing them of overstepping their authority.

At the hearing, Ohio Republican lawmaker Warren Davidson said that giving the NAIC the power to overturn private ratings “would lead to lower transparency, bring more ambiguity for insurers, and materially impair market efficiency.”

Doug Ommen, an insurance commissioner for Iowa, said regulators have always had the authority to adjust risk scores they consider too high. He said:

Regulatory work will not stop because we are seeking improvement.

Private credit penetrates the insurance industry; scale exceeds $1 trillion

The regulatory dispute above reflects structural changes in the private credit market in recent years—its deep penetration into the U.S. insurance industry. To understand this controversy, it is necessary to clarify the unique nature of private credit letter-ratings.

Similar to publicly issued bond ratings, private credit letter-ratings are also commissioned by the issuer or the asset bundler to a rating agency, which then issues a credit rating based on the borrower’s probability of repayment.

Investors (including insurance companies) may also commission rating agencies to rate the debt instruments they hold. But the key difference is that private credit letter-ratings are only visible to the debt issuer and investors; they are not disclosed to the public, which makes external oversight substantially more difficult.

With limited manpower, insurance regulators in each U.S. state cannot evaluate every investment one by one, so they rely heavily on the NAIC New York investment team’s mechanism for automatically assigning risk scores based on publicly available credit ratings, which then determines capital requirements.

Over the past decade, insurers began submitting private credit letter-ratings to the NAIC in an effort to secure treatment equivalent to that of other credit investments. NAIC staff have long had concerns about directly adopting these ratings, and the report above is a concentrated reflection of those concerns.

The NAIC said that state insurance regulators have “for years continued to actively monitor and gradually respond to the evolving dynamics of insurers’ investment portfolios.” However, for a market with an asset scale nearing $1 trillion and inherent limitations on transparency, the regulatory catch-up battle is far from over.

Risk disclosure and disclaimer terms

        There are risks in the market; investment requires caution. This article does not constitute personal investment advice, nor does it take into account any specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are consistent with their specific circumstances. You assume responsibility for any investment made based on this.