Many Private Equity firms have captive life insurers where they can place their risky Private Credit deals. If the Private Credit goes bad and the life insurer fails, state insurance commissioners are responsible for the bailout.
I’d be worried if I Iived in a state with historically corrupt insurance regulation like Texas or Florida.
intercst
I am not sure this bit is factual:
That’s because instead of passing through bankruptcy, insolvent life insurers have all their liabilities—in particular the policyholder claims—paid for by state guaranty funds.
State guaranty funds operate much like FDIC and cover up to similar limits. That means that if an insurance company defaults, the state may have to cover a similar amount for policyholders. The portion in excess of those amounts is at risk of loss for the policyholder, not the state.
Since you mentioned Texas, here is their info:
Specifically:
Life and Health: Covers life insurance ($300,000 death benefit limit), health insurance ($500,000 for major medical), and annuities ($250,000 present value limit) per person.
For a life insurer, the Private Credit loan is an asset. The benefits owed to the policyholders are liabilities.
The corruption is that some states to a better job than others in assessing the quality of the assets (e.g., Private Equity loan placements) backing up the life insurance policies.
In a large default, the state guaranty fund would have to increase the assessment on the remaining solvent insurers to pay the defunct carrier’s claims. What are the odds that they would come after a politically-connected large Private Equity firm? You can buy a state legislator for a $1,000 in most states.
intercst
Again, I am not positive this is always the case. Yes, much like FDIC does, a state may increase the fees other insurance companies pay to cover debts but there are specific cases where that is not permitted under law. Buying a legislator won’t change that. To whit:
State insurance guaranty associations do not provide bailouts for risk retention groups (RRGs) or surplus lines (non-admitted) carriers when they become insolvent. Under federal and state law, guaranty funds are restricted exclusively to standard, licensed (admitted) carriers.
Here is one such example:
These Private Equity firm own captive life insurance companies selling policies in the state, not reinsurance firms. The life insurance company is investing in Private Credit, the same way it would buy a corporate bond from Exxon or Pfizer, or a loan on an office building.
intercst