I am disturbed but not surprised to read concern from S&P at the increased dependency on private credit to back promises to pay our pensioners. This from an article published today by the FT written by Lee Harris , insurance correspondent
Thanks to the FT for publicising this. A group of us, who call ourselves “PAGA” have for some time argued that there is not “zero risk” in transferring to what has been called “gold plated” insurance policies to pay our pensions.
It is not just that there is risk but that the risk is unreported in the “TAS 300” risk comparisons that actuaries are relied on to produce prior to a buy-out end game.
The extent of the exposure of our lead insurers active in “de-risking” our DB schemes is charted
By way of balance, the FT include comments from spokespeople from L&G and Standard Life. It is reassuring to still have some British owned insurers but not so reassuring that the backing to the promises they make is increasingly replacing banks by using what are called “level 3 bonds” that aren’t as secure as annuities previously relied on.
Regulators and credit rating groups in the US and UK have started to study these holdings more closely as private capital firms such as Apollo, Blackstone and Brookfield have expanded in the sector, buying insurers or striking deals to manage their investments.
These asset managers are driving a boom in lending to AI software companies, data centres and a broader range of middle-market borrowers, increasingly replacing the banks that might once have provided the financing. Much of this debt has ended up in the portfolios of insurers.
So long as risks taken are disclosed
Insurers are not required to disclose, for example, where their borrowers are based, which sectors the loans are exposed to or whether the debt is held directly or through tranches of structured financial products.
As a rough proxy for UK life insurers’ private credit exposure, S&P examined so-called Level 3 assets, which lack observable market prices, and then stripped out some types of loans such as infrastructure debt and certain types of mortgages.
The measure does not capture the full extent of UK life insurers’ exposure to private credit.
For example, S&P said, Pension Insurance Corporation, a group recently acquired by Apollo-backed insurer Athora, probably held much of its private credit exposure in a different category of “Level 2” assets.
So long as exposure isn’t taken beyond what S&P have found..
S&P also stress tested a hypothetical UK life insurer’s portfolio with about 12 per cent exposure to private credit. After assigning the loans a range of investment-grade ratings, it found that the insurer would retain sufficient capital to withstand a shock similar to the 2008 financial crisis.
The worry that persists is that the risk being taken within insurance companies portfolios creeps beyond levels currently stress- tested.
