Global Atlantic, MassMutual Put 25% of Bond Allocations in Privately Rated Assets: Moody's

The private credit investments "will contribute to more diversified, higher-yielding and better liability-matched portfolios," the Moody's analysts wrote in their report. "However, growth in private credit also reduces transparency, lowers liquidity and makes valuations more complex."

The analysts did not comment specifically on the transparency of specific issuers' PLR bonds.

What it means: Financial professionals who are helping clients with life insurance and annuities may want to read more on the topic to find out what they think about the rise of private credit.

Financial professionals helping with holistic planning may want to see how any given client's use of life insurance policies or annuities backed partly by insurers' private credit portfolios meshes with the client's own private credit portfolio allocations.

The backdrop: Different teams use different definitions of "private credit." The Moody's team included bonds issued through "private placement" programs by big, highly rated companies along with bonds from big companies with low ratings, loans to small and midsize companies, and securities backed by assets such as pools of credit card loans or loans to small businesses.

Private credit has become more popular over the past 15 years partly because the disruption of the 2007-2009 Great Financial Crisis and banking regulations imposed since then have caused banks to reduce levels of some kinds of lending.

The Moody's analysts wrote about life insurers' use of credit because of investors', regulators', consumers' and advisors' questions about what increased insurer use of private credit means.

In addition to analyzing life and annuity issuers' PLR bonds, the Moody's analysts looked at allocations to assets such as asset-backed securities.

Using the broadest definition, U.S. issuers have put about $2 trillion in private credit arrangements, the Moody's analysts noted.

Growth in the use of private credit seems to be higher at U.S. issuers than at European issuers, the analysts added.

PLR bonds: Moody's, AM Best, Fitch, S&P Ratings and other "nationally recognized statistical rating organizations" publish public bond ratings.

Credit issuers can also get ratings from NRSROs through a simpler, cheaper "private letter" process.

The issuers get "rationale reports" from the rating agencies. Insurers usually send the rationale reports to an arm of the National Association of Insurance Commissioners that helps assess insurers' investments. They may also send the reports to major investors, but ordinary investors may not get to see the rationale reports, according to the Moody's analysts.

One thing the NAIC looks for when assessing PLR bonds is the potential for conflicts of interest between the entities issuing the bonds and the insurers. In same cases, the analysts noted, the asset managers that create the PLR bonds own the life and annuity issuers that buy the bonds.

The PLR bond issuers and the affiliated life and annuity issuers may try to mitigate the conflicts of interest by performing separate due diligence on both sides and ensuring that insurers buy the bonds only if outside entities also invest in them, the analysts said.

"Regulators will likely continue to pay close attention to instruments with assigned PLRs," the analysts predicted.

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