U.S. insurers face scrutiny over private credit ratings use

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U.S. insurers private credit scrutiny

Highlights

U.S. insurers hold $807bn of illiquid credit instruments, with private ratings now accounting for 12 per cent of life insurance group portfolios and up to 36 per cent at some firms.
Research shows a 10-fold increase in private rating use since 2018, and eliminating public-private rating gaps could raise required capital charges by $4.5bn annually.
Regulators, including the U.S. Treasury and SEC, are increasing scrutiny of private ratings, as analysis finds they average 2.74 notches higher than public ratings, raising stability concerns.

Private ratings and capital reserve concerns

As reported by Financial Times, insurers are increasingly relying on private credit ratings for illiquid assets as they expand into higher-yielding private credit markets. The article says this shift is drawing attention because those ratings, often commissioned from agencies such as Morningstar, Egan-Jones and Kroll, can support lower capital reserves than traditional public ratings.

Moody’s calculates that insurance groups hold $807bn of illiquid and opaque credit instruments, equal to 20 per cent of their $4tn in fixed-income holdings. Research by economists Xuelin Li, Sangmin Oh and Giacomo Ricciardi identifies a 10-fold increase in the use of private ratings since 2018, mainly in opaque securities and among large insurers and private equity-owned groups.

The researchers say privately rated assets now account for 12 per cent of all U.S. life insurance group portfolios, with much higher shares at some firms, including 36 per cent at Everlake, 28 per cent at NZC Capital and 24 per cent at Athene. They estimate that removing the gap between public and private ratings would raise required capital charges on insurers’ bond holdings by $4.5bn a year, implying that parts of the sector may be undercapitalised.

Regulatory debate and broader market implications

The Bank for International Settlements recently warns that private ratings appear to be systematically inflated relative to public ratings, which can create a stronger impression of safety and improve current profitability while weakening resilience to future shocks. Industry participants dispute that conclusion, with Morningstar saying the academic research contains errors and assumptions, while criticism from Fitch triggers objections from Kroll over competitive motives.

In 2024, the National Association of Insurance Commissioners released research suggesting private ratings are on average 2.74 notches higher than public ratings, but it later retracted the paper after backlash from private capital groups and newer rating agencies. Even so, the analysis continues to influence work by the European Central Bank, the IMF and the Financial Stability Board, all of which are warning about related risks.

Regulators are showing greater awareness than before, with the U.S. Treasury recently discussing the issue with insurance groups and the Securities and Exchange Commission scrutinising Egan-Jones. Even if a 2008-style shock appears unlikely and current defaults remain relatively low, the trend points to continuing regulatory arbitrage in insurance and private credit, with potential consequences for sector stability and investor confidence.

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