Bermuda Monetary Authority tells insurers they still own the risk in outsourced private credit

Insurers that hand the management of their private-credit portfolios to an outside asset manager do not hand over the obligation to understand them, Gerald Gakundi, the Bermuda Monetary Authority's deputy managing director for insurance and investment funds, told delegates at the Bermuda International Life and Annuity Conference. Boards are accountable for the risks attached to assets on the company balance sheet, he said, whether or not the company's own staff are the ones choosing the loans.

He was speaking on a panel that seated investment managers and regulators together to discuss private credit's growing role in supporting life insurance and annuity obligations, the ground where the asset managers that originate the debt meet the insurers and reinsurers that hold it.

Alternative managers have spent years buying, reinsuring and flow-partnering with life insurers to secure permanent capital, and regulators have moved from watching that traffic to writing rules for it. PWD's reporting has traced the general account's appetite for the assets private-equity firms have been selling into insurance balance sheets, including tranched fund stakes and sliced NAV loans that amount to a new asset class for the buyer. Private credit is the larger version of the same question, and Gakundi put the accountability for it back on the buyer.

For Gakundi, the risk list looks broadly the same whatever the credit: valuation, concentration, liquidity, the correlation of one exposure to another, and governance. What differs with private credit is how those risks present themselves under stress, and the authority has to stay conscious of that, he said. The test he applies is whether insurers can carry the understanding through to the supervisor. He framed the demand as an obligation to explain what the insurer is invested in, which borrowers and which collateral, because that knowledge is what generates the added visibility a regulator needs. Insurers therefore need people in house with the expertise to supply it, he added.

The framework he cited is the BMA's Prudent Person Principle, which the authority uses to check that insurers understand the risks of what they invest in, that policyholder interests are protected and that boards answer for the outcome. A regime built on principle, without a schedule of permitted assets, leaves the evidentiary work with the firm, and the quality of the answer depends on who is in the room when the question is asked.

Bridget Hagan, a managing director at Blackstone, used her turn to argue that private credit is read more harshly from the outside than the loans warrant. Speaking for the firm, she said 95 per cent of the debt investing Blackstone does for insurance companies is investment grade, and suggested banks had pulled back from some categories of lending largely for regulatory reasons rather than doubt about borrowers' creditworthiness. Borrowers come to private deals for speed and certainty of execution, she added.

Barrie Ribet, managing director and head of asset origination at Global Atlantic Financial Group, took on what she called the myth that private credit lacks transparency. An investor, a rating agency or a regulator sees as much of a private credit investment as of any other, she said; the public sees less only because the transaction is private, and structuring a deal by hand can leave the investor better informed in some respects.

The number is the useful part of the managers' case, because it turns a reputational argument into a testable one: if the bulk of what firms like Blackstone run for insurers is investment grade, the dispute is about what sits below that line. The panel coverage offers no independent check on the figure.

Hagan's claim is about one firm's insurance book rather than the asset class, and Ribet's is about who holds the loan file. Gakundi's requirement is that the insurer be among the parties with that sight line, which is why the call for in-house expertise carried more weight than a general warning to be careful.

That puts the BMA's position beside the capital work already under way in the United States. The NAIC's private-credit perimeter letter to Senator Warren put ratings and valuation reviews over a $1.2 trillion book, and its reach extends to Bermuda's $1.52 trillion reinsurance sector, where the US supplies 82 per cent of business.

The gap between a charge in a formula and a question at an examination matters because Bermuda's capital recognition rests on the credibility of its supervision. The NAIC's move to develop a capital charge for cessions outside reciprocal jurisdictions turned the island's earned recognition into a capital advantage. Principles-based oversight is cheaper to run and, for now, better treated under the US formula, but the cost of that approach is the reliance it places on the firm's own account of itself: the supervisor's grip on a private loan book runs through the people the insurer puts forward to explain it.

Rating agencies are asking a version of the same question from their side of the table. AM Best's warning on offshore annuity reinsurance flagged that reserve credits are rising faster than the collateral backing them, a gap that measures how hard the assets behind a promise have become to see from outside the transaction.

Hagan's 95 per cent, taken at face value, leaves five cents of every dollar of Blackstone's insurance lending outside investment grade, and a supervisor's questions about borrowers and collateral are shaped to reach that remainder. What Gakundi described is a standard that lives or dies in an examination, and the panel coverage does not say whether the BMA intends to put it into guidance, examination modules or anything with a number attached. The working version of it is a person on the insurer's payroll who can describe the borrowers and the collateral without handing the question back to the manager.