Private Credit Investments May Be Impacted by NAIC’s “Deactivation” Direction

For the last several years, an increasing number of investment managers have been offering “rated feeder fund” interests as a way to attract insurance company capital to invest in private credit strategies. The interest in the industry has been driven by the confluence of a challenged fundraising environment for traditional private capital managers as well as increased appetite from insurance companies to better match the regulatory capital treatment of investments in these funds with the regulatory capital treatment of the funds’ underlying credit investments. In these structures, the insurance company investor obtains a debt commitment in or purchases notes from a feeder vehicle. In order for the insurance company investor to obtain favorable NAIC Designation treatment, the investment manager facilitates these notes by obtaining a private letter credit rating, which letter would typically include a rationale report (a “Rationale Report”), from nationally recognized statistical rating organizations (“Rating Agencies”). When a private letter credit rating is obtained, the notes are considered “privately rated securities” for insurance regulatory capital purposes.

At a meeting on November 17, 2024, the Valuation of Securities (E) Task Force (the “Task Force”) of the National Association of Insurance Commissioners (the “NAIC”) directed the NAIC’s Securities Valuation Office (the “SVO”) to begin to “deactivate” privately rated securities issued after January 1, 2022 that do not have a Rationale Report on file with the
SVO. Such investments will no longer be eligible for “filing exempt” status, and insurers that hold them will need to submit a filing to the SVO for analysis and assignment of an NAIC Designation, or “self-file,” which will likely result in a less favorable NAIC Designation and higher capital charge for the investment.

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