Why Private Credit Got Entangled With Insurance
Private equity firms have created a complex ecosystem pairing private credit funds with insurance companies to access stable, long-term capital sources. However, this arrangement may be shifting risk from regulated banks to insurers while exploiting weaker regulatory frameworks and an outdated insurance guarantee fund system that lacks risk-based capital requirements and pre-funding mechanisms.
Summary
The OddLots podcast episode explores the increasingly entangled relationship between private equity, private credit, and insurance companies. After the 2008 financial crisis, policymakers deliberately moved risky assets out of the regulated banking system into private credit funds to prevent taxpayer bailouts. However, private equity firms have strategically acquired insurance companies to serve as repositories for these private credit assets, creating what McKinsey calls a "flywheel" of synergies: PE firms originate risky loans, private credit funds issue debt, and affiliated insurers hold these assets on their balance sheets, capturing liquidity premiums while providing better terms to policyholders.
Guests Andrew Granato (UT Austin law professor) and Pranjal Dral (Yale JD/PhD candidate) explain that insurers are theoretically ideal vehicles for private credit because they have long-dated liabilities, patient capital that can hold illiquid assets for extended periods, and a dispersed retail policyholder base with limited scrutiny. However, this arrangement creates significant structural risks. Unlike banks, which are regulated federally through the FDIC with pre-funded insurance at a $250,000 cap and risk-weighted assessments, insurance regulation remains fragmented across states with post-insolvency guarantee funds that levy assessments only after failure occurs. Critically, solvent insurers pay these assessments post-facto and often receive full tax credits (20% annually over five years in most states), making this economically equivalent to an automatic taxpayer bailout without legislative oversight.
The paper identifies multiple problems with current insurance regulation: (1) Private letter ratings for insurance assets are non-public and subject to conflicts of interest, with mounting empirical evidence suggesting systematic overvaluation of private credit assets; (2) The statutory coverage cap of approximately $300,000 covers only the 40th percentile of life insurance policies, leaving wealthy policyholders exposed; (3) Affiliated asset arrangements create potential conflicts of interest where PE-owned insurers may prioritize parent company returns over policyholder protection; (4) The absence of risk-weighted capital requirements incentivizes riskier investing, especially as an insurer approaches distress; (5) Shadow reinsurance through captives in low-tax jurisdictions like Bermuda removes visibility from regulators regarding asset quality.
The speakers discuss how this system differs dangerously from banking regulation. Banks face constant federal monitoring of industry exposure (e.g., SaaS lending concentration), but insurers lack equivalent oversight. The NAIC has far fewer resources than federal banking regulators and operates through state-level coordination. Additionally, while banks cannot attract deposits with excessive rates due to FDIC-imposed deposit rate caps, insurers can aggressively compete for premiums without such constraints, incentivizing desperate insurers to take on excessive risk.
Historically, state regulation of insurance emerged from pre-1940s Commerce Clause interpretations and persisted despite a Supreme Court reversal because Congress disclaimed federal authority through the McCarran-Ferguson Act. When waves of property-casualty insolvencies in the 1960s-1970s prompted federal regulatory proposals, the NAIC preempted them by creating state guarantee funds. This decentralized approach has persisted despite obvious inadequacies.
The paper proposes several reforms: (1) Valuation-based reforms including Pigouvian taxes on opacity for difficult-to-value assets; (2) Eliminating tax credits for guarantee fund assessments and moving toward pre-funding mechanisms similar to the FDIC; (3) Applying the "source of strength doctrine" from banking law, where parent companies in insurance groups would be liable for guarantee fund payouts, aligning incentives across the corporate structure.
The episode concludes with a timely example: Federal prosecutors are investigating Mark Walters (L.A. Dodgers owner and Guggenheim principal) regarding Delaware Life and another affiliated insurer. Guggenheim's revised financial disclosure revealed that affiliated assets on Delaware Life's balance sheet increased from reported levels of 3-5% to 40% upon closer examination, exemplifying the lack of transparency and potential misrepresentation in the current system.
About this episode
<p>Insurers have quietly become a major driver of the private credit boom, with numerous private equity shops striking deals with insurance companies or buying them outright. But the entanglement with private credit is also changing the insurance industry itself, raising a number of questions about risk and regulation. Today we speak to Andrew Granato and Pranjal Drall, authors of a new paper, “Private Credit's State Backstop: How Private Equity Socializes Risk Through Insurers," examining the relationship between private credit and insurance. Granato (an assistant professor at the UT Austin Law School) and Drall (JD-PhD student in Financial Economics at Yale) talk to us about how PE got so interested in insurance in the first place, how both sides benefit from the relationship, and why taxpayers might ultimately be on the hook.</p> <p>Read more:<br /><a href="https://www.bloomberg.com/news/articles/2026-07-30/blue-owl-reports-fund-raising-slow-down-amid-credit-pullback?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article">Blue Owl Surges as Leaders Stress It’s More Than a Direct Lender</a><br /><a href="https://www.bloomberg.com/news/articles/2026-07-29/ares-29-billion-private-credit-fund-sees-uptick-in-non-accruals?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article">Ares $29 Billion Private Credit Fund Sees Uptick in Non-Accruals</a></p> <p>Only <a href="http://bloomberg.com/">Bloomberg - Business News, Stock Markets, Finance, Breaking & World News</a> subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at <a href="https://www.bloomberg.com/subscriptions/oddlots?in_source=oddlotspodcast">bloomberg.com/subscriptions/oddlots</a></p> <p><a href="http://bloomberg.com/subscriptions/oddlots">Subscribe to the Odd Lots Newsletter</a><br /><strong>Join the conversation:</strong> <a href="https://discord.gg/oddlots">discord.gg/oddlots</a></p><p>See <a href="https://omnystudio.com/listener">omnystudio.com/listener</a> for privacy information.</p>
Key Insights
- Private equity firms intentionally acquired life insurers to access patient capital from policyholders' long-dated liabilities, creating what McKinsey calls a 'flywheel' where affiliated private credit funds can place risky loans on insurer balance sheets while capturing liquidity premiums.
- Insurance guarantee funds operate fundamentally differently from FDIC banking insurance: assessments are levied post-insolvency on surviving insurers based on premium volume rather than pre-funded and risk-weighted, making the failed insurer contribute nothing while creating an automatic taxpayer-funded bailout through tax credits.
- The statutory $300,000 coverage cap in insurance guarantee funds only protects approximately the 40th percentile of life insurance policies, leaving wealthy policyholders and institutions exposed to losses despite the existence of a backstop, whereas FDIC coverage of $250,000 protects a higher percentage of checking accounts.
- Private letter ratings for insurance assets remain non-public and unavailable for external verification, with mounting empirical evidence showing systematic overvaluation of private credit, creating a rating inflation problem that paradoxically penalizes high-quality asset managers competing with risk-inflated alternatives.
- Insurers lack the federal monitoring of industry concentration risk that banks face, meaning concentrated exposure to specific industries (e.g., 30% of private credit in software) can develop without regulatory warning, increasing systemic risk from correlated failures.
- The post-insolvency assessment structure creates a perverse moral hazard where distressed insurers are incentivized to take excessive risk because they bear no costs of the guarantee fund, while surviving insurers cannot constrain this behavior without federal oversight mechanisms banks possess.
- Federal prosecutors investigating Guggenheim's affiliated insurers discovered that Delaware Life's reported affiliated assets jumped from 3-5% to 40% upon revised disclosure, demonstrating that the current valuation and reporting regime enables significant opacity regarding actual asset composition and potential conflicts of interest.
- McCarran-Ferguson Act's preservation of state-only insurance regulation, established in 1945 to prevent federal authority, has persisted despite subsequent Supreme Court reversals and multiple waves of insolvencies, with the NAIC deliberately creating weaker state guarantee funds in the 1960s-1970s to forestall federal regulation rather than improve consumer protection.
Topics
Transcript
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