Short Sellers and Academics Target PE-Owned Life Insurers Over Massive Private Credit Exposures and "Rating Inflation"

Short Sellers and Academics Target PE-Owned Life Insurers Over Massive Private Credit Exposures and "Rating Inflation"

The rapid expansion of private credit has been heavily fueled by U.S. life insurance companies, many of which have been acquired or are managed by private equity (PE) giants like Apollo, Blackstone, and KKR.¹ While this relationship has unlocked hundreds of billions of dollars in funding, it has also emerged as a major focal point of systemic risk. In June 2026, a landmark academic study from Columbia Business School accused the industry of hiding credit risk through privately rated bonds, triggering a fierce backlash from credit rating agencies like Kroll Bond Rating Agency (KBRA).

The Columbia Study: "Rating Without Market Discipline" (June 2026)

Published in early June 2026, the Columbia Business School research paper, "Rating Without Market Discipline" (authored by Xuelin Li, Oh, and Riccardi), provided a comprehensive analysis of the rapid growth of privately rated bonds held by U.S. life insurers.

The paper's findings are central to the debate over insurance company capital adequacy:

• Exponential Growth: Privately rated bonds held by U.S. life insurers grew from $46 billion in 2018 to $481 billion in 2025, increasing from 1.5% to 12.2% of total insurer bond portfolios.
• Rating Inflation Claims: The authors concluded that private ratings tend to understate investment risk relative to public ratings. They found that privately rated bonds experienced higher subsequent impairment rates (other-than-temporary impairments, or OTTI) than similarly designated publicly rated securities.
• Capital Arbitrage: By utilizing private ratings that are higher than public equivalents, insurers generated lower regulatory capital requirements. The study suggested that correcting for this "rating inflation" would imply a two-notch downgrade across the private rating universe, exposing a significant capital shortfall.

The Rating Agency Backlash: KBRA's Rebuttal

On June 9, 2026, KBRA released a sharp rebuttal titled "Private Credit: Much Ado About Nothing – Perspectives on Columbia Business School Paper About Private Ratings", disputing the study's systemic risk claims and methodology.

KBRA and other rating agencies (including Morningstar DBRS) argued that the Columbia paper overstates the scale of the issue and relies on flawed assumptions:

• Minimal Capital Impact: KBRA pointed out that even if all of the paper's assumptions were accepted, the implied capital shortfall for the entire U.S. life insurance industry would be only $4 billion. This represents just 0.5% of the industry's total adjusted capital, 0.6% of industry surplus, and less than 0.1% of invested assets. The aggregate risk-based capital (RBC) ratio would only decline from 868% to 830%—far from a systemic solvency crisis.
• Flawed Impairment Proxy: KBRA criticized the study's reliance on other-than-temporary impairment (OTTI) rates as a proxy for default risk or rating accuracy. Impairments are accounting measures, not direct indicators of default or expected loss, and the study treated all impairments equally regardless of severity.
• Speculative-Grade Bias: The rating agency argued that the strongest evidence of rating differences was concentrated in speculative-grade (high-yield) securities, which represent only a minor fraction of the private letter rating market (most of which is investment grade).

"Even if one accepts the entirety of the paper’s analytical assumptions and inferential steps as valid... the authors’ own illustrative capital exercise implies approximately $4bn of additional required capital for the entire US life insurance industry... representing roughly 0.5% of industry total adjusted capital..."

Regulatory Scrutiny and Market Implications

Despite KBRA's pushback, the Columbia paper has added significant fuel to the ongoing regulatory scrutiny of the PE-insurer-private credit nexus. Regulators like the National Association of Insurance Commissioners (NAIC) and the Federal Reserve are actively reviewing whether insurers are using private credit ratings to engage in regulatory capital arbitrage.

Short sellers and activist investors have also seized on these findings to target PE-owned insurers, arguing that their massive private credit portfolios are overvalued and under-provisioned. While the industry maintains that private credit assets are highly resilient, the debate over "rating inflation" and capital adequacy is set to intensify as defaults creep higher across the broader credit market.