Investors are growing increasingly worried about US life insurers’ exposure to private credit, after many firms piled into the opaque asset class in an attempt to boost their investment returns.
Insurance is now among the worst-performing sectors in the US investment-grade bond index, with investors only willing to buy insurers’ bonds at yields around 1 percentage point above Treasuries, up about 0.2 percentage points since late January, according to Ice BofA data. Big insurance stocks have also trailed the S&P 500 index so far this year.
Worries over lax underwriting standards and lending to businesses vulnerable to AI disruption have led to a surge in redemption requests at private credit funds. The unease has spread to insurance companies’ investment portfolios, which have added substantially more private credit assets in recent years.
“When people are worried about asset prices, they sell insurance companies,” said Connor Fitzgerald, fixed income portfolio manager at Wellington Management. “It’s like a private credit second derivative trade.”
Life insurers, which provide annuities and other long-term products, traditionally invest heavily in low-risk assets such as government bonds and highly liquid credit.
But US life insurers in particular have increased their exposure to illiquid private credit in recent years in the hope of better long-term returns. At the same time, some insurers have themselves been taken over by private capital groups.
Private credit assets held by the US life insurance industry grew by more than a fifth last year, bringing the sector’s exposure to about 10 per cent of total assets at the end of 2025, according to analysis by Barclays. This exposure could exceed 15 per cent for insurance companies affiliated with private equity firms, including Apollo-backed Athene and KKR-backed Global Atlantic, Barclays said.
While the majority of private credit assets held by insurers are rated as investment grade, some investors take such ratings with a pinch of salt as they are often provided by small rating agencies with little history and few resources. They often take the form of so-called private letter ratings, which are used to rate private assets and are provided to the issuer or the investor paying for the rating rather than being made public.
“It really comes down to, do you believe the ratings? There’s probably some rating inflation in the private market,” Fitzgerald said.
Investors are concerned not only about illiquidity and potential defaults, but also that insurance firms may turn out to be undercapitalised should the ratings of their private credit investments be overstated. If such ratings were suddenly downgraded, insurance companies could be required to increase their capital reserves, slowing business growth and hurting their creditworthiness.
Beginning this year, the National Association of Insurance Commissioners in the US has the power to override private letter ratings if they differ from the regulator’s own analysis by more than three rating notches.
If a large majority of private letter ratings were downgraded by three notches, the life insurance industry’s aggregated risk-based capital ratio — which measures insurers’ capital adequacy — would fall from 440 per cent to 394 per cent, according to estimates by Fitch Ratings, one of the three largest rating agencies.
Jamie Tucker, a senior director at Fitch, said he had recently received large numbers of client enquiries about insurers’ holdings of private assets backed by businesses’ cash flows — a private credit product popular among insurance companies.
“What are the underlying collaterals of these investments? Are they restaurant franchises? Are they music royalties? Are they data centres? We really don’t know much from public filings,” Tucker said.
The limited transparency has prompted some investors to reduce their holdings of life insurers’ bonds or to demand higher yields than current levels until there is enough disclosure to measure the credit risks.
“In terms of how strong these investments are, the visibility is not as high as public investments. That’s the problem,” said Anthony Woodside, head of multisector fixed income investment at L&G Asset Management, America, which has reduced its exposure to the insurance sector in recent months.
Others have made active bets against insurers on the basis of private credit concerns.
“We hold some credit default swaps on some of the insurers who we think may well be affected [by a private credit downturn],” said Lee Robinson, founder and chief investment officer at Altana Wealth. Credit default swaps pay out if the borrower they relate to defaults on its debts and become more expensive as the perceived risk of default rises.
“Even if you don’t get the right insurer, if any one of those has problems, the whole sector will widen out,” Robinson added.
In recent industry conferences, investors have called on insurers to provide more information about their private credit holdings, including the percentage of so-called Level 3 assets that are highly illiquid, as well as their exposure to the software sector, according to people familiar with the matter.
“Look, if you have nothing to hide, just give us as much disclosure as possible,” said Tom Murphy, global head of investment-grade credit at Columbia Threadneedle Investments. “We’re just people who crave information.”
Peter Troisi, a credit research analyst at Barclays, which recently reduced its portfolio weighting for the life insurance sector to underweight, said the “front and centre” concern for investors was “transparency, as opposed to acute credit risk”.
“The sentiment is more around the fear of the unknown,” he said.
Additional reporting by Ian Smith in London
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