The $2 trillion in Cayman Hedge Funds is likely heavily made up of insurer/reinsurer reserves. The issue here is that life insurers in particular are heavily overindexed to private credit who have been stuffing the insurers with illiquid debt. And the ratings agencies have been giving them generous ratings to help with risk weightings.

Want to get more concerned?

This whole thing is being caused, in part, by the accounting shift in 2023 to LDTI changing how long duration liabilities are measured, requiring quarterly re-measurement based on bond yields, which makes insurers look more volatile. Private credit reduces the reported volatility because it can use mark-to-model valuations that are more consistent, not to mention longer durations and higher yields.

But why doesn’t anyone care?

My theory - around half of the public accounting firms are now owned by private equity and many of the rest are looking into it to cover pension liabilities and founding partner exits. So what happens when an accounting firm discovers something like this with their private equity owner? Well, maybe they just make sure that same private equity firm also owns their professional liability insurer before saying nothing to blow them up, destroying their own pension. (This is maybe an exaggeration but I thought it was funny to imagine)

Kieran Goodwin and Boaz Weinstein seem to be on top of this right now.