The financial sector was the biggest laggard in Friday’s trading session with insurance stocks dragging down the XLF (XLF) after a report from A.M. Best published Friday morning warned of growing risks on the balance sheets of insurance giants tagged to private credit.
The biggest losers in the financial sector Friday were shares of Ares (ARES), Arthur J. Gallagher (AJG), Aon (AON), and Willis Towers Watson (WTW).
In the report, which the Wall Street Journal first broke early Friday morning, A.M. Best notes risks within annuity products that fared well during the financial crisis, but now face a new “undercurrent of financial instability in some asset classes against a backdrop of greater economic and geopolitical instability.”
The report warned that annuity reserves, or the capital that backstops the payment guarantees made by an annuity, have moved to lower-quality issuers and often to overseas affiliates that offer less transparency to investors.
“PE/AM-backed insurers have entered the annuity market in a frenzy over the last five years as annuity premiums have surged,” the report adds. “These asset managers have used the higher yields earned from their private credit portfolio to offer higher crediting rates on product offerings and winning some market shares.”
To oversimplify a bit, more companies have moved into the annuities space because it’s an attractive source of capital: win upfront payments, earn a return on that capital, pay it out slower than it comes in the door, keep the spread.
And as the report notes, a lot of that capital has moved into private credit, which itself operates on a similar dynamic: gather assets, deploy them to earn a return, pay out some of that return your investors, keep the spread.
But with rising questions about the private credit asset class — both in terms of the quality of their investments and the durability of the investor base — more analysts are calling out more risks in new areas of the financial system.
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