Private equity investor J Christopher Flowers has raised concerns about the growing systemic risk posed by the increase in private credit investments by life insurance firms. Flowers, a former Goldman Sachs partner known for his turnaround of troubled lender Long Term Credit Bank of Japan and distressed investments after the 2008 financial collapse, warned that the risks associated with these assets are underestimated.
According to Flowers, some investments are funded by life insurance assets, which could lead to significant losses for life insurance companies due to their exposure to private credit. He further cautioned about the potential for a bank run if loss rates in private credit portfolios increase, since policyholders can withdraw their assets from life insurance products. This could trigger a run with other people’s money, leading to substantial losses for firms and investors.
The growth of private credit investment funds has been notable, reaching $1.5 trillion with annual growth doubling to 23% between 2020 and 2022. This growth is driven by private equity groups managing insurance assets. Major private equity firms such as Blackstone (NYSE:), Apollo, Brookfield, KKR, and Carlyle Group (NASDAQ:) have partnered with or acquired life insurers to invest in broader portfolios of credit-oriented assets.
Moody’s reported that private equity-owned insurers have invested $102 billion into asset-backed securities, nearly three times the exposure held by the broader insurance industry. The overall growth of private credit assets has raised concerns about potential company failures due to insurers holding an excess of debt.
The recent placement of Eurovita, a private equity-backed insurer based in Italy, into special administration following heavy withdrawals from policyholders seeking higher interest rates has intensified these concerns. This event has sparked worries about the health of other private equity-backed insurers in light of a swift rise in interest rates.
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