Toby Nangle is our top analyst working on American bonds , whether the credit is public or private of something in the middle. We should worry if there’s a problem with American insurers owning this stuff.  Insurers  using it to back up annuities for people in the UK, most importantly people who were in pensions and are now being paid in their older ages by insurers. Insurers who are backed by American insurers owned by private equity who see an opportunity to hustle an opportunity to make money out of backing up annuities with this private and semi private credit that Toby Nangle is worried about.

Toby does not go so far as express his concern, he has done his job by explaining how it is that American insurers are flirting with problems and may be in trouble without having to say so.

Infact , he finishes his brilliant article , passing the task of analysing whether there is an impact on British insurers owned by Americans to the Bank of England who are due to report on this next year

Toby concludes

it would be fascinating to get a handle on what spillovers these kinds of stresses might have on the rest of insurers’ balance sheets. For that we’ll maybe have to wait for the results of the Bank of England’s private markets system-wide stress exercise in 2027.

There are analysts of bonds who read my blogs, Con Keating among them , for whom the work of Nangle will be of interest and as most readers will not have got this far, I will use a sharing link up so that if they press this link, they can see not just this story but a list of others they can request free shares from me (henry@agewage.com) . Here is a taster of the amount of work being done on American insurers (the links are not live) but can be requested from me (reasonably)

I am not an analyst and though I can follow the brilliant Toby Nangle, it is only so far. His head is so much more clear on this stuff than mine will be. But my feeling is that Nangle is not comfortable, his style is one that will be understood by those who like him are involved in analysing these markets

Upsum: big meh, at least from an insurer rating perspective. And the meh stays big for almost every insurer even after chucking the kitchen sink and maybe the bathtub too at their private credit holdings, narrowly defined.

About that narrowness

If you’re a private credit bear you’re probably thinking that the issue could one of definitions, not of methodology.

But S&P’s super-narrow taxonomy of private credit isn’t dumb or unthinking. There’s a lot of concern that is quite specific to both middle-market borrowers, and the opacity of insurers’ exposure.

Taking a more expansive view of private credit that captures more than a third of US life insurer balance sheets — and then extrapolating concerns about private credit that are mostly specific to middle-market borrowers — would produce a distorted, perhaps catastrophising, analysis.

So we can understand why S&P’s stress scenarios are so laser-focused. However, Alphaville can see some issues with its approach.

While it’s great to shine a flashlight on the darkest corners of insurers’ bondholding, any actual middle-market CLO tranches held that happen to carry public ratings are excluded from the stress tests, as is every other tradeable or publicly-rated credit instrument. Which feels weird.

My interpretation of this is that it would be wrong to call insurers “in trouble” but there’s a chance the problem that they have is greater than even the S&P’s reports can detect.

My worry is that by the time that the troubles of some US insurers is fully apparent, things may be too bad to put right and people will find themselves not getting their pension paid.