J. Christopher Flowers, a US private equity investor, has warned life insurers that the dramatic increase in their private credit investments may create systemic risk for investors, as reported in an article in the Financial Times.
“Too many people have piled into private credit and it has a special feature that a chunk of it is funded with life insurance assets,” said Flowers.
Flowers asserted that investors may be underestimating the risks that come from a large amount of money going into private credit loans, with insurers hoping for higher investment.
“One of these days, some life insurance company is going to get whacked on their private credit . . . You can have a run on a life insurance company,” he added in the interview.
Flowers expressed concern about the overall growth of private credit assets, which are mostly managed in private and public investment funds.
Over the past decade, several of the largest private equity groups in the world have either acquired or partnered with life insurers in order to invest broader portfolios of credit-oriented assets. These insurers have increased their investments into private credit assets like securitised products, private debts, and lower-rated loans.
Moody’s, a global integrated risk assessment firm, recently found that private equity-owned insurers invested $102 billion into asset-backed securities. This was almost a third of their total bond investments and three times the exposure held by the broader insurance industry.
With insurers holding a significant amount of these assets, Flowers said it may result in a systemic issue or a company blow-up. This is because if loss rates rise in private credit portfolios and alarm investors, policyholders of life insurance products may withdraw their assets and cause a bank run.
“It is where private credit growth and a run with other people’s money could actually happen. No-one’s really paying attention to it,” said Flowers.
An example of this occurring happened earlier this year with Eurovita, a private equity-backed insurer in Italy. After its policyholders withdrew their assets in search of higher interest rates, it was placed into special administration.
“Somebody is going to get zapped . . . probably more than one firm, and it will be a rude awakening for investors,” said Flowers.
Flowers runs J.C. Flowers & Co., a private equity investment firm, and was previously a Goldman Sachs, a multinational investment bank and financial services company, partner.
What do you think about Flowers’ warning? Share your thoughts in the comments below.
