Why Private Credit Got Entangled With Insurance

The core argument. Andrew Ganado and Pranjal Dral contend that the private-credit boom's marriage to insurance has quietly recreated the loss-socialization problem regulators spent the post-2008 era trying to eliminate — just one financial-sector hop removed from banks. Their paper argues the public backstop protecting insurance policyholders is structurally worse than the one protecting bank depositors, even as private equity has aggressively expanded its ownership of life insurers (recent estimates put roughly $750 billion of life-insurance assets within PE's purview).

The mechanism. Post-2008 policy deliberately pushed risky lending out of deposit-insured banks into private credit, where losses were supposed to sit with investors, not taxpayers. But insurers — with long-dated, patient liabilities — are a natural home for illiquid private credit, since they can capture the illiquidity premium without LPs demanding liquidity. PE firms exploited this by building a "flywheel": a buyout arm, a private-credit fund, and an owned or affiliated life insurer that buys that fund's paper, generating management fees at every layer (and often fees for accounting, valuation, and other affiliated services on top). Third-party arrangements, where an unaffiliated insurer shops for the best private-credit manager, sit at one end of a spectrum; full PE control of an insurer's balance sheet sits at the other.

The risk-transfer works because of opacity. Private-credit loans held on insurer balance sheets get "private letter ratings" from agencies like Egan Jones that are not publicly visible and cannot be independently checked — a process Dral says has drawn a steady stream of empirical findings of overvaluation. The state regulator association (NAIC) translates those ratings into a 1-10 risk notch and requires capital against it, echoing bank capital rules, but with far less scrutiny of the underlying assets. Ganado notes this dynamic paradoxically penalizes conservative insurers: a manager holding genuine investment-grade private credit gets bucketed similarly to one holding inflated middle-market paper, since the NAIC notch system doesn't distinguish well at the margin.

The real distinction from banking, per the paper, is the guarantee-fund structure. FDIC deposit insurance is pre-funded and risk-weighted: banks pay quarterly risk-based assessments into a fund before any failure. Insurance guarantee funds are the opposite — post-funded and purely premium-volume-weighted, with no risk adjustment. When a life insurer fails, it doesn't go through bankruptcy; the domiciliary state runs a simultaneous, multi-state insolvency proceeding, and only after failure are surviving insurers in that state assessed to cover policyholders up to a statutory cap (roughly $300,000, versus FDIC's $250,000 — though life-insurance policies skew larger, with the cap covering only about the 40th percentile of policies). Critically, in roughly 34 states insurers can claim a full tax credit against that assessment over five years (about 10 years in another 10 states; only six states offer no credit at all) — which Ganado says makes the arrangement "economically equivalent to a taxpayer bailout," just one nobody votes on. Because the failed insurer itself pays nothing toward its own guarantee-fund cost, and survivors only pay after the fact, the system also removes any FDIC-style rate cap on what a distressed insurer can offer policyholders — creating what Dral calls an incentive for a "homesy... bad man insurer" heading into distress to write increasingly generous, risky business precisely because it won't bear the cost.

What has to be true, and what could break it. The whole arrangement has never been tested at scale: there has been no major life-insurer failure comparable to a 2008-style bank event, aside from smaller cases like Executive Life in the early 1990s (a few billion dollars in assets). Ganado and Dral flag two related fragilities. First, asset-side correlation: insurers hold roughly 10-15% of assets in private credit, and if a third of that is concentrated in one sector such as software, a downturn there could hit many insurers simultaneously, a risk banking regulators monitor far more closely on the lending side. Second, a feedback loop specific to non-tax-credit states: a bad macro environment that takes down one large insurer triggers assessments on already-weakened peers at the worst possible moment, a risk partially offset elsewhere by the tax-credit mechanism but not eliminated where rates are rising and credits are stretched over five-to-ten years. The authors are separately researching whether insurance liabilities themselves can run — noting that cash-value whole-life policies with withdrawal rights behave more like demand deposits than is generally assumed, and that a run occurred at Executive Life in the early 1990s. They also highlight "shadow reinsurance": captive reinsurers domiciled in Bermuda, Iowa, or Vermont let insurers move assets and liabilities off balance sheet and out of NAIC's otherwise granular CUSIP-level visibility, effectively erasing the data trail regulators rely on.

Proposed fixes and a live example. The authors suggest a menu of reforms: a capital surcharge (a "Pigouvian tax on opacity") applied to any asset class that's structurally hard to value, rather than trying to police individual loan valuations; ending the tax credits insurers currently receive against guarantee-fund assessments, or pre-funding the system entirely along FDIC lines; and importing banking's "source of strength doctrine" so that affiliates within an insurance holding group can be required to help cover guarantee-fund payouts rather than leaving the burden solely on unrelated survivors.

Hosts Joe Weisenthal and Tracy Alloway closed by noting a live example as of the July 30 recording: federal prosecutors are reportedly investigating Guggenheim owner Mark Walter, whose affiliated insurers Delaware Life and Clear Spring recently revised disclosed affiliated-asset exposure from a previously reported 3-5% up to roughly 40% of total assets.