- Of the ~$6 trillion in assets held by U.S. life and annuity insurers, nearly $1 trillion is now in private-credit investments — including $419 billion carrying “private letter ratings” that are not publicly disclosed
- A 2024 NAIC study found those private ratings were routinely inflated: in 106 of 109 cases reviewed, private ratings exceeded NAIC analysts’ own assessments, with 17 assets rated investment-grade by outside firms that NAIC staff considered junk — the study was quietly pulled from the NAIC website in May 2025
- Small ratings firms (Egan-Jones, KBRA, Morningstar) awarded grades averaging three notches above NAIC staff assessments; the big three (Moody’s, S&P, Fitch) were about two notches higher — and Egan-Jones is now tangling with the SEC over its capacity to “consistently produce credit ratings with integrity”
- Treasury plans a series of meetings with state insurance commissioners on private-credit market risks; NAIC analysts only gained authority to challenge inflated private ratings in January 2026 — more than five years after they first asked for it
What Happened?
As private credit grew from a Wall Street niche into a multi-trillion-dollar market, U.S. insurance companies became one of its largest funding pools. Life and annuity insurers now hold nearly $1 trillion in private-credit assets, according to A.M. Best — a share of their $6 trillion total that has roughly tripled in five years. To get favorable regulatory capital treatment for those investments, insurers began submitting “private letter ratings” — grades assigned by credit-rating firms that are available only to issuers and investors, not the public. A landmark 2024 NAIC study found those ratings were routinely inflated, in some cases by as many as six notches above what the NAIC’s own analysts believed was appropriate. The study was pulled from the NAIC website in May 2025 and remains unpublished. Treasury has now announced a series of meetings with state insurance regulators to assess risks in private-credit markets.
Why It Matters?
Insurance companies are not hedge funds — they hold the savings and retirement annuities of millions of Americans, and regulators require them to hold capital buffers commensurate with the risk of their investments. If ratings are inflated, those buffers are too thin. The problem is structural: state commissioners lack the staff to evaluate each private-credit investment individually and rely heavily on ratings to set capital requirements. Small, newer ratings firms have grown influential in this market, and the NAIC study found their private grades were on average three notches higher than what NAIC staff assessed — with Egan-Jones, the most frequent small-firm rater, now facing SEC scrutiny over its rating integrity. Meanwhile, redemption pressure is building across private-credit markets as investors grow nervous, which could force insurers to sell assets at prices that reveal how the credit risk was understated.
What’s Next?
NAIC analysts finally gained limited authority in January 2026 to challenge private ratings more than three notches above their own assessments — more than five years after first requesting the power. An outside consultant has been hired to review the NAIC’s ratings-based risk methodology. Treasury’s planned meetings with state commissioners represent unusual federal-level attention to a market traditionally left to state oversight. How aggressively regulators move to tighten capital requirements — and whether doing so could force insurers into a disorderly rebalancing of their massive private-credit books — will be one of the more consequential financial regulatory questions of the next 12 months.
Source: The Wall Street Journal
