Insurers who outsource management of their private-credit holdings to asset managers still have a responsibility to understand them, a top Bermuda regulator said.

Gerald Gakundi, deputy managing director, head of insurance and investment funds at the Bermuda Monetary Authority, told delegates at the Bermuda International Life and Annuity Conference that boards were accountable for the risks involved with assets sitting on the company balance sheet.

His comments came during a panel discussion between investment managers and regulators about the growing role of private credit in supporting life insurance and annuity obligations.

Mr Gakundi said risk considerations are broadly similar for all types of credit, including valuation, concentration risk, liquidity, risk correlation and governance. How private credit risks manifest themselves under stress can be different, he said, and “we have to be to be conscious of that”.

“Insurers have to be able to understand in a way that enables them to explain us what they’re investing in,” Mr Gakundi said. “That understanding breeds transparency, because you can only be able to provide that extra level of visibility if you understand the investments, including who the borrowers are and what the collateral is.”

Insurers therefore needed people in house with the right expertise to provide this understanding, he added.

The BMA’s Prudent Person Principle, cited by Mr Gakundi, is the regulatory framework used by the BMA to ensure that insurers understand the risks of what they’re investing in, that policyholders’ interests are protected and that company boards are appropriately accountable.

Bridget Hagan, a managing director at asset-management giant Blackstone, challenged the public perception of private credit as risky and opaque.

“I will speak for Blackstone when I say that 95 per cent of the debt investing we do for insurance companies is investment grade,” she said.

She offered context on the growth of private credit, suggesting that banks had pulled bank from some types of lending often for regulatory reasons, rather than any concerns about the creditworthiness of borrowers. For borrowers, the speed and certainty of execution made private transactions appealing.

Barrie Ribet, managing director, head of asset origination at Global Atlantic Financial Group, a retirement solutions company, challenged the “myth” that private credit lacked transparency.

“There is not less transparency to an investor, to a rating agency, to a regulator about a private credit investment, there’s just less transparency to the public eye about what’s going on because it’s a private transaction,” Ms Ribet said.

“In certain ways, the investor may actually be getting access to more information because you are structuring a deal, which may require you to actually get access to much more information.”

Question marks over private credit ratings were also difficult to justify, Ms Ribet argued.

“The ratings agencies are regulated by the SEC [Securities and Exchange Commission] in the United States, they’re required to publish their criteria publicly on their websites,” she said.

“They’re required to apply that criteria consistently. So, I think when you get a private rating, the difference is again just in the manner of delivery and who has access.”

Peter Giacone, senior managing director, insurance at ratings agency KBRA, agreed.

“From personal experience, I can tell you frequently when we start a ratings engagement on one of these types of transactions, the analytical team, which includes folks like myself, may not even know if it’s going to be a public or private transaction - the reason is exactly what was just described: we’re applying the same methodology,” Mr Giacone said.

Mark Sagat, chief regulatory affairs officer at the National Association of Insurance Commissioners, the US standard-setting body, added a regulatory perspective.

“To Barrie's point, there’s access and availability - the question is, how forthcoming is anyone in that regard?” Mr Sagat said.

“It’s incumbent upon us, as regulators, to ask the right questions of the industry to get the access and availability of what we need to get comfortable.”

He also described some of the NAIC’s focus areas, including private-credit rationale reports, enhanced disclosures, updated bond definitions, credit-rating-provider due diligence, portfolio analysis and risk-based capital work.

The panel also touched on liquidity concerns, which centre on private credit investments being more difficult to sell to raise cash than publicly traded bonds.

Ms Hagan said investors were getting compensated with an “illiquidity premium” she estimated at between one and two percentage points. And for life re/insurers, such investments made sense.

“Insurance companies are primarily liability-driven investors,” Ms Hagan said. “If you have illiquid liabilities, you need long-duration assets that you can hold, with an illiquidity premium. That is not only appropriate; it is desirable within the right guardrails.”