Why Private Credit Got Entangled With Insurance

Private equity firms have discovered that owning a life insurance company solves one of their most persistent problems: capital that redeems. McKinsey describes the resulting structure as a flywheel in which a PE sponsor operates three coordinated subsidiaries simultaneously, a buyout arm, a private credit fund, and a life insurer. The insurer holds long-dated liabilities and patient capital, allowing it to absorb illiquid private credit loans without the redemption pressure that would otherwise constrain the credit fund. Approximately 750 billion dollars of life insurance assets are now estimated to be within private equity's purview, and life insurer portfolios that historically held conservative AAA-rated bonds are shifting toward affiliated private credit investments.

The arrangement creates short-term benefits that make it difficult to regulate politically. PE-owned insurers offer better annuity terms to policyholders because the sponsor earns additional returns through illiquidity premiums and management fees, making the product market more competitive. Empirical data supports this consumer benefit, but the concern is that obligations come due decades later, long after the pricing decision was made. Retail annuity purchasers, unlike institutional investors such as endowments and pension funds, have generally not examined what sits on the other side of the insurer's balance sheet.

The valuation regime governing those balance sheets is structurally opaque. Private credit assets on insurer books carry private letter ratings that are not publicly visible and cannot be compared against a track record. The NAIC sees only the values reported to it, and new empirical economics literature is continually finding overvaluation in private credit assets held by insurers. Insurers hold roughly 10 to 15 percent of assets in private credit depending on measurement, and approximately a third of that exposure may be concentrated in software, meaning a single industry could represent close to 30 percent of the entire private credit allocation. Shadow reinsurance compounds the opacity problem: when a US life insurer transfers assets and liabilities to a captive subsidiary in Bermuda, Iowa, or Vermont, the CUSIP-level visibility that NAIC quarterly data normally provides disappears entirely.

The insurance backstop protecting policyholders is weaker than FDIC deposit insurance in several compounding ways. Federal deposit insurance is pre-funded through quarterly risk-based assessments paid by banks to a standing fund. Insurance guarantee funds instead levy assessments on surviving insurers only after an insolvency occurs, meaning the failed insurer contributes nothing. The statutory coverage cap is roughly 300,000 dollars per policyholder, which covers only about the 40th percentile of life insurance policies, leaving a majority of policies above the limit. In approximately 34 states, surviving insurers receive a full tax credit against guarantee fund assessments taken at 20 percent per year over five years, and in about 10 additional states the credit is spread over roughly 10 years. Because the tax credit fully offsets the assessment in most states, the guarantee fund is economically equivalent to a stealth taxpayer bailout that occurs automatically by operation of law without any legislative vote. A large national insurer with hundreds of billions in assets has never actually failed and been resolved through this system, leaving the mechanism completely untested at scale.

The guarantee fund structure also creates moral hazard because a distressed insurer has incentive to take on more risk and offer attractive premiums since it will not bear the cost of its own insolvency. Unlike the FDIC regime, the insurance regulatory system has no mechanism capping the rates or terms insurers can offer. Guarantee fund assessments are based purely on premium volume and are not risk-weighted, so two insurers with identical premium volumes but different investment risk profiles receive identical treatment, creating an implicit subsidy for riskier insurers. A bad macroeconomic environment causing multiple large failures could trigger assessments on surviving insurers already under stress, potentially producing a vicious insolvency cycle.

The Guggenheim case illustrates how affiliated asset concentrations can be obscured. Delaware Life and Clear Spring, insurers affiliated with Guggenheim, initially reported affiliated assets at roughly 3 to 5 percent of total assets. After federal prosecutors began investigating Mark Walters, who controls Guggenheim, a review revised the affiliated asset proportion to approximately 40 percent. Insurance is regulated at the state level with no federal equivalent to the FDIC, a structure rooted in the McCarran-Ferguson Act of the 1940s, which reserved all regulatory authority to the states. The NAIC is a nonprofit association, not a public entity, and has far fewer resources than federal banking regulators.

Three regulatory fixes have been proposed. A Pigouvian capital surcharge on opacity itself would apply to asset classes that are structurally hard to value regardless of the quality of individual underlying assets, penalizing the structural problem rather than trying to assess each loan. Ending the tax credits insurers receive for guarantee fund participation and moving to pre-funding would transform the system into something closer to a federal deposit insurance equivalent. Applying the source of strength doctrine from banking law to insurance holding groups would require affiliates to contribute to guarantee fund payouts when an insurer becomes insolvent, aligning the incentives of the PE sponsor with the long-term solvency of the insurer it controls. None of these fixes has been adopted, and the concerns about private credit quality on insurance balance sheets are described as beginning to surface rather than having materialized into a visible crisis.