US life insurers feel private credit scrutiny

A series of recent developments has put US life insurers with significant private-credit linkages under greater regulatory and investor scrutiny. While we believe this could create pressure for some US names, we see limited evidence that the concerns are spilling over into European life insurers.

We have noted in the past that the US life insurance space is certainly more heavily exposed to private credit than other jurisdictions around the world. Specifically, in Japan, alternative assets represent less than 5% of insurers’ allocation. In Europe, it is higher at about 15% to 20% but focused on mortgage-related exposures (mostly equity release mortgages in the UK). In the US, the share is north of 30%, and it is skewed by the presence of private equity (PE)-owned insurers (which hold an even higher proportion). In light of recent headlines and regulatory scrutiny, we believe the impact is more likely to be pronounced for US life insurers than for peers in other territories.

Just last week, the Delaware Department of Insurance noted it is reviewing an application from Aquarian Capital (private markets operator) and its affiliates to acquire control of Brighthouse Life Insurance Company (publicly listed). There is no sign any wrongdoing has been found, nor that the transaction agreed last December will be struck down. Brighthouse shares fell nevertheless, as the public press release is unusual, and at a minimum the extended examination increases the risk of the deal falling through. As things stand, Brighthouse shares trade at $52 per share, close to the level seen before Aquarian’s offer, suggesting the market believes there is only a small probability that the transaction proceeds.

Last week, we also had a short seller report from Hunterbrook targeting another life insurance firm, Sammons, alleging irregularities around the disclosure of related parties to Mark Walter’s Guggenheim. In both cases, the affected insurer’s bonds have weakened, but there has also been a visible nervousness in the private credit-owned insurers, where spreads have widened.

In June, the National Association of Insurance Commissioners (NAIC) moved to adopt revised risk-based capital (RBC) factors for life insurers’ investments in collateralised loan obligations (CLOs), which culminated in a project that started in 2022. Under the new framework, the capital charge attached to a CLO would depend not only on the rating but also, in certain cases, on where the tranche sits in the capital structure and how thick that tranche is. The expectation is that senior investment-grade corporate bonds, particularly for AAA to A-rated securities, would benefit from lower charges under the new regime. However, lower-rated CLO tranches would face materially higher capital charges, with an additional capital surcharge for certain thinner tranches. Private-equity-owned insurance firms have been heavy users of CLOs linked to the private credit assets originated by their related groups, and so they will feel this impact. 

Also in June, two insurance companies linked to Guggenheim CEO Mark Walter (Delaware Life Insurance Co. and Clear Spring Life and Annuity Co.) disclosed in their reports that they had received grand jury subpoenas in February. More specifically, federal prosecutors had raised questions about their failure to reveal that billions of dollars in private credit holdings were tied to other segments of Mark Walter's business empire.

All of these developments are happening against the backdrop of PHL Variable, which is still in the rehabilitation phase, but expected to transition into liquidation as soon as 2027. As policyholders are set to experience losses, the authorities seem particularly vigilant to ensure they will minimise similar outcomes for other holders of insurance products. Private credit-linked insurers appear to be particularly in focus as a result.

So far, we have seen limited linkages and spillover to the European lifers, noting the reporting season has been a strong one so far. This is not to say that European life insurers may not face headwinds or will not see some spread widening as a result (indeed, we may see it especially for PE-owned European life names). We do, however, take comfort from the fact that most European life insurers have not seen such explosive growth in specific asset classes (or specifically in private credit), and as a result we do not see the same scope for regulatory scrutiny as we are witnessing in the US.

Furthermore, we see the regulatory backdrop as more cohesive. In the US, firms mainly benefit from state-level oversight rather than federal oversight. In Europe, insurers are primarily supervised and regulated by their specific national authorities, such as the Central Bank of Ireland or Germany’s Federal Financial Supervisory Authority (BaFin), while the European Insurance and Occupational Pensions Authority (EIOPA) acts as an overarching EU coordinator. We have also seen European regulators take decisive action to mitigate risks. BaFin, for example. The regulator pushed Cinven to sell Viridum Group after problems at its Italian insurer Eurovita. In the UK, the Prudential Regulation Authority (PRA) has taken a strict approach to funded reinsurance, a practice widely used by US insurance firms that may increase business model vulnerability during periods of stress. 

All in all, we acknowledge the increased spotlight on US life insurance firms. We view regulatory efforts that seek to reduce risks not fully captured by the current framework as constructive. At the same time, we see European life insurers as more insulated from this year’s developments in the US, supported by the regulatory and fundamental picture in Europe.