The Determinants of Private Debt Holdings: Evidence from the Life Insurance Industry

Abstract

Life insurers hold the majority of private debt. Lenders in the private debt market must have the ability to evaluate the credit quality of borrowers and to perform ongoing risk monitoring. The relatively low liquidity of private debt and renegotiation potential enhances the value of a long-term relation with a reputable lender. The less transparent risk of private debt and the absence of market valuation for private debt provide relatively more risk-shifting opportunities than public debt. Transactions costs and diversification needs tend to give larger lenders a comparative advantage in the private debt market. The purpose of this study is to examine the determinants of private debt holdings in the life insurance industry. The results suggest that larger insurers, insurers with higher financial quality, mutual insurers, publicly-traded insurers, insurers facing stringent regulation, and insurers with greater cash holdings are more prevalent lenders in the private debt market.

Keywords: Private debt, life insurance, investment policy

JEL Classification: G11, G22, G31