Egan-Jones' Lenient Ratings Spark 100 Billion Dollar Insurance Funds Influx

In 2008, rating agencies were infamous for their role in the subprime mortgage crisis. Now, a similar "rating game" is unfolding in the private credit market, with potentially more hidden risks. A small rating agency, Egan-Jones, completed over 3,000 private credit transactions in 2024 with a team of just 20 people, making it one of the most active players in the field. Its lenient ratings have facilitated the influx of nearly 100 billion dollars of insurance funds into high-risk assets, prompting collective resistance from institutions like BlackRock and Apollo, and an internal report from the National Association of Insurance Commissioners (NAIC) accusing its rating system of systematic overvaluation.

The headquarters of Egan-Jones, located on Haverford Station Road in the suburbs of Philadelphia, is an unassuming colonial-style four-bedroom house. Despite its modest appearance, the company has become a significant player in the private credit market. In 2024, Egan-Jones provided credit ratings for over 3,000 investments with a team of approximately 20 analysts, a feat that has raised concerns among financial experts. "Just because something is labeled 'investment grade' doesn't mean it actually is," said Samuel Bonsall, a professor of accounting at Pennsylvania State University.

Egan-Jones' efficiency is often cited as a key advantage. Unlike larger agencies such as Standard & Poor's and Moody's, which can take months to complete a rating, Egan-Jones typically provides an initial assessment within 24 hours—sometimes even for free—and a formal rating within five days. However, this speed often comes at the cost of thorough evaluation. Egan-Jones usually provides a one-page explanation for its ratings, whereas traditional agencies offer detailed reports of 20 pages or more.

Some of Egan-Jones' optimistic ratings have proven to be highly inaccurate. Last year, a company that received a BBB rating from Egan-Jones began defaulting on interest payments just six weeks later. These ratings have helped Wall Street transfer large amounts of complex debt to life insurance companies, which manage the retirement savings of millions of policyholders. According to data, the total exposure of U.S. insurance companies to private credit investments is rapidly approaching 100 billion dollars.

Despite Egan-Jones' claim to be the largest rating agency in the private credit market, Wall Street has begun to question its credibility. Insiders reveal that BlackRock, Carlyle Group, and other investment giants have explicitly excluded Egan-Jones from their list of acceptable credit rating agencies for certain capital-raising activities. Apollo Global Management also does not use Egan-Jones for rating any private credit assets held in its insurance business.

A report, which was suddenly withdrawn by the NAIC, indicated that small agencies like Egan-Jones rate private investments an average of three levels higher than the NAIC's internal valuation office. This discrepancy could lead to a systematic underestimation of financial risks. In 2024, two former employees sued Egan and his wife, Wenrong Hu (then the chief operating officer), for violating federal securities laws. The couple is accused of pressuring analysts to change preliminary ratings to attract potential clients for final ratings and to later modify ratings to create the illusion of consistency with other agencies.

The private credit market's reliance on small rating agencies like Egan-Jones raises significant concerns about the potential for another financial crisis. The speed and leniency of Egan-Jones' ratings, combined with the lack of thorough evaluation, could lead to a systemic underestimation of risks, similar to the subprime mortgage crisis. As the market continues to grow, it is crucial for regulators and investors to closely monitor the activities of these small rating agencies to prevent a repeat of past mistakes.