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Insurance Companies Crushed As Private Credit Contagion Spills Over

Tyler Durden's Photo
by Tyler Durden
Sunday, Mar 08, 2026 - 01:15 AM

Long before the latest meltdown in private credit, we warned last October, that the first domino to fall after the private credit bubble had burst, would be insurance companies. The reason: private credit represents 35% of their total US investments, which when all is said and done, would guarantee that insurers would be this generation's "widows and orphans", so well popularized by their willingness to buy all the toxic slop that made the global financial crisis of 2008... well, a global financial crisis.

For those unfamiliar with the particular dynamic between the $1.8 trillion private credit sector and Warren Buffett's darling $10 trillion insurance industry, here's why the ending will by anything but happy, as explained by the Bank of International Settlements last October (a must read report for everyone who has even a passing interest in Private Credit):

The exponential growth of private credit has raised concerns that credit provision is migrating from strictly regulated banks and relatively transparent public markets to the comparatively lightly regulated and opaque private credit industry. The emerging financial system, however, is marked by intertwined operations whereby traditional institutions like banks and insurers, as well as alternative nonbanks like private credit funds, are not substitutive entities but instead part of an increasingly integrated system. Recent partnerships among the private credit industry, banks, and insurers highlight that cooperation can generate significant economic benefits for the parties involved. To realize these benefits for the broader economy, adjustments to supervisory and regulatory approaches are needed to address the buildup of risks across sectors and borders.

Insurance Companies

Private credit has long been an important component of insurers’ portfolios, especially in North America, where it represents about one-third of total investments  (Figure 1.1.3, panel 1).

Private credit instruments offer insurers additional spread for illiquidity and supply long-duration assets to match their long-term liabilities. However, increasing exposure to private credit requires advanced asset-liability management to account for higher asset illiquidity, policy surrender risk, and single-name concentrations. Whereas some private credit investments represent simple credit originated by nonbank lenders, a significant and growing portion of insurers’ private credit portfolios is in structured instruments providing leverage to the high-yielding part of the private credit ecosystem: for example, securitized products (such as middle-market collateralized loan obligations and commercial real estate collateralized loan obligations), fund financing through feeder notes, collateralized fund obligations, and private placements of private credit funds’ debt. A growing share of insurers’ private credit exposure is sourced through either affiliated private credit managers or partnerships with private credit managers, which requires special attention because of potential conflicts of interest and the lack of transparency.

Most insurers’ exposure to private credit is classified as investment grade, and many private credit instruments would be much less appealing if classified as below investment grade. The investment-grade status allows favorable risk-capital treatment and considers the instruments’ cash flows sufficiently reliable to qualify for asset-liability matching. Insurers’ search for private credit exposures classified as investment grade has changed the rating landscape in the United States, with an increasing share of the assessment being conducted by smaller rating agencies specializing in the private credit ecosystem (Figure 1.3.1, panel 2).

And the BIS punchline, keep this in mind as you read on: 

Misclassification of below-investment-grade instruments into the investment-grade bucket may result in default losses significantly exceeding those expected during an economic shock, leading to the erosion of insurers’ capital and potentially causing liquidity gaps because of insufficient cash flow from the defaulted entities. Because reliable private ratings are key for insurers’ prudential regulation, it is imperative to keep the risk of inflated ratings minimal by ensuring the soundness of private rating assessments and requiting adequate transparency of methodologies and reports.

Well, we are sorry to say that 4 months after we warned that insurers will eventually get dinged, the first domino has finally fallen. 

The catalyst was the mounting fears surrounding Private Credit's massive exposure to Software/SaaS loans which may very well all be a big doughnut in a world where AI agents have made legacy programmers and associated "stable cash flows" obsolete...

Source

... which in turn sparked a gentle bank-jog at first which promptly mutated into a panicked bank-run among private credit investors, starting a month ago with the forced selling of two Blue Owl funds (to avoid officially gating investors) which as we explained was the "be first" moment in the Margin Call liquidation epiphany, escalated when UBS raised its private credit default forecast to a shocking 15%, forced BlackStone's own employees to foot a $400 million redemption shortfall out of their own pockets at the world's largest private credit fund, the Blackstone Private Credit Fund, (once again to avoid officially gating investors), and culminating this week with BlackRock throwing in the towel, and officially gating investors in its massive $26 billion HPS Corporate Lending fund, a move that is sure to spark a full blown redemption panic among remaining private credit investors (which is why both Blue Owl and BlackStone were so desperate to avoid crossing the gating threshold).

Incidentally, the fact that another BlackRock private credit fund, TCP Capital, announced just a day prior that it was remaking one of its portfolio loans from 100 cents (as of Sept 30) to 0 (as of Dec 31) did not help lift sentiment.

Meanwhile, as discussed in "All Hell Breaks Loose In Private Credit", a whole host of smaller private credit funds have either been spontaneously collapsing under the weight of redemptions, or have been forced to mark their loan book from myth to reality, also leading to more redemptions. All of this, and more, we have discussed extensively in the past 2 months in a series of must-read articles detailing the bursting of the private credit bubble, of which the key ones are listed below:

Of course, if instead or private credit funds, these companies were say, plain vanilla traditional banks, the current capital flight would have a name: bank run.

But since private credit fund have structural limits on how much money can be pulled, investors are forced to line up and wait to see just how bad it gets before they get some fraction of what is owed to them. 

Meanwhile, as those same investors are finally flipping out about their exposure to the private credit bubble, and scrambling to figure out where the next shoe will drop, we go back to the start of this post, and our prediction from October that Insurers will be this generation's "widows and orphans", and our more recent tongue-in-cheek call for a Fed bailout of PC this year, with the name "Private Credit Funding Program" looking quite attractive.

Which brings us to the crack in the insurance sector, which is the first in line once the private credit contagion spills out. 

As Goldman credit strategist Spencer Rogers wrote in a Thursday note (available to pro subscribers), the worries around artificial intelligence’s disruptive potential and risks in private credit deals have pushed US high-grade spreads wider, with the latter particularly affecting life insurers’ bonds. 

Rogers starts by assessing the impact of the latest dire BDC news, writing that "in recent weeks, there has been a spate of concerning headlines regarding both public and private BDCs, including NAV writedowns, large outflows, asset sales, dividend cuts, and redemption gates." He estimates that as a result of the recent selling, publicly traded BDCs now trade at a 20% discount to their NAV on average. 

Next, the Goldman analyst picks up where we left off in "Credit Markets Finally Crack As Private Credit Contagion Infects Public Markets" and writes that a frequent question among market participants is to what extent will the challenges being felt in private direct lending spill over to publicly traded credit and/or the broader economy.

Now, since Goldman has still not fully loaded up on financial shorts and hedges, Rogers' job is to get clients to stay long for a little longer, and writes that he still thinks that "the risk of private credit becoming a systemic concern remain quite low and that the primary channel through which the troubles in private direct lending could flow through to broader credit markets is through risk sentiment," which of course is the primary channel through which troubles flowed through during the 2008 crisis  

To justify his bullish view, Rogers' colleagues recently noted that they "continue to believe non-traded BDC outflows do not pose systemic risk given: (1) the sector’s small size relative to total private markets; (2) sources of liquidity internally on NT BDC balance sheets, and; (3) ample available capital in the ecosystem to purchase loans if they do come up for sale.” That view will surely change now that even Blackrock is openly gating investors, creating a self-fulfilling private bank run prophecy..

For his own part, Rogers says that on the debt side he estimates that there are 141 bonds issued by public and private BDCs with a total notional outstanding of $74 billion. And despite an average rating of BBB- and spreads that trade wider than the BB index on average, he does not think "there is much risk yet that many of these funds become fallen angels. None of these bonds is on downgrade watch by the three major rating agencies and only one issuer with $3.75 billion outstanding is currently on outlook negative." All we can say here is that relying on rating agencies, as so many did in 2007 and 2008, to justify one's bullish view at a time when many are openly talking about a private credit crisis is... bold.

Unfortunately for bulls like Rogers, the market no longer is buying the bullish thesis, and one just has to look at - what else - the insurance sector to see just how bad it is.

As the chart below shows, average yield premiums across US life insurer notes are about 45 basis points wider than those of broad US corporate investment-grade bonds, double the gap 12 months ago, Bloomberg indexes show.

The data shows that spreads on life insurer debt widened to as high as 132 basis points earlier this week, the highest since May, although they trimmed the move ahead of what is sure to be another big move wider in coming days as a result of the Iran war. 

As the Goldman strategist concedes, "a confluence of headlines around AI disruption and, more recently, private credit has pushed USD IG insurance spreads wider, with the move unfolding in two distinct legs — first in late January as the broader complex repriced on AI fears and then more sharply in life insurers as private credit concerns intensified."

That's because, as we first pointed out in October, "The market narrative centers on life insurers as a conduit for private credit risk and on the growing web of ownership and distribution ties between insurers and alternative asset managers."

Here, too, Rogers tries to put a favorable spin on things writing that his review of a representative sample of life insurers suggests balance sheet positioning is less aggressive than feared as the median allocation to alternatives is only 6%.  He argues that investors have instead focused on corporate credit - the largest asset class for these firms - where Rogers estimates an average 22% allocation to “private securities” within the broader available-for-sale portfolio for insurers that disclose the split.

The silver lining here is that corporate bonds represent a meaningfully smaller share of Level 3 fair-value assets — the least observable and most model-dependent bucket —which suggests many holdings are more consistent with broadly distributed private placements (e.g., Rule 144A or Regulation S) rather than truly hard-to-price instruments.

Rogers' rather cheerful conclusion is that the recent selloff is more headline-driven than fundamental, and while "betas to alternative asset managers may remain elevated as scrutiny of private credit grows and it takes little to move already tight spreads, we do not think current fundamentals warrant continued sharp repricing of the sector."

In essence what Goldman is saying is that while insurers certainly have substantial and very opaque (read Level 3) exposure to private credit, what they are getting punished for is their corporate credit exposure, which however is far more marked-to-market, and thus less at risk of sharp repricings of the Infinite Commerce Holdings, which as Blackrock learned the hard way, was priced from par to 0 in three months. 

While we commend Goldman on its valiant attempt to defend insurers, and especially life insurers whose bonds have gotten smashed in the past two weeks, we are going with the far more dire assessment from the Bank of International Settlements, which recall found that "private credit has long been an important component of insurers’ portfolios, especially in North America, where it represents about one-third of total investments." And what is far more ominous is that "misclassification of below-investment-grade instruments into the investment-grade bucket may result in default losses significantly exceeding those expected during an economic shock, leading to the erosion of insurers’ capital and potentially causing liquidity gaps because of insufficient cash flow from the defaulted entities."

As the current deposit flight, and gating spree, accelerates and as rating agencies are finally forced to start doing their work, and/or face billions in legal fees as investors start asking questions - just as they did in 2009 - expect an avalanche of fallen angels in the space, leading to the next shock, one which will push insurance bond spreads surging, especially once investors realize that nobody took the BIS warning seriously:

Because reliable private ratings are key for insurers’ prudential regulation, it is imperative to keep the risk of inflated ratings minimal by ensuring the soundness of private rating assessments and requiting adequate transparency of methodologies and reports.

Unfortunately, as Bloomberg reported late last year, the sad reality is that no less than 3,000 private credit investments have been "rated" by an old, four-bedroom colonial house on Haverford Station Road, just outside of Philadelphia...

Egan-Jones Ratings Co. has for years operated from a four-bedroom colonial in Haverford.​Photographer: Sarah Silbiger/Bloomberg

... housing 20 analysts, where rating agency Egan-Jones has quietly transformed its business by becoming the "tiny firm that is the the market's most prolific grader of private credit."

Source

Unfortunately for both Egan Jones, and the world of private credit, trouble was already brewing late last year before the current SaaSpocalypse panic (see "Egan-Jones Probed By SEC Over Its Credit Ratings Practices", "Egan-Jones Whistleblower Builds Private-Credit Rater of His Own", "Egan-Jones Ratings No Longer Recognized by Bermuda Regulator"). And yes, this is the same Egan-Jones which already was charged once already by the SEC with conflict of interest violations.

The good news is that for now, few are able to fully connect all the dots, and the war in Iran is only providing a great distraction to what is really going on. But once things in the Middle East go back to normal, and attention reverts to ground zero of the next credit bubble, we expect to see a historic blow up in insurer spreads and, by extension, credit default swaps. 

Come to think of it, the company which truly accelerated the global financial crisis with its cascade of forced credit downgrades, AIG, was also an insurer... 

More in the full Goldman note available to pro subscribers.

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