US life insurers are increasingly turning to less-liquid and privately rated fixed-income assets to enhance investment returns, a trend with direct implications for insurers' balance sheets and policyholder risk. 

As of year-end 2024, private letter-rated (PLR), Z-rated, and Level 3 holdings totaled $685 billion, or 18% of the industry's $3.8 trillion fixed-income portfolio, concentrated among the top 10 insurers, according to a report from Moody's.

While these investments can provide higher yields, their lower liquidity and weaker credit profiles create potential challenges for insurers in meeting policyholder obligations. About 41% of these assets were rated NAIC 2 or Baa, with 10% below investment grade - double the share in broader portfolios - raising the risk of credit losses or rating downgrades during market stress.

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Private credit exposure

Private credit, including private placements, mortgage loans, asset-backed finance, and niche strategies such as litigation finance or infrastructure, has expanded as insurers seek diversification beyond public markets. These investments align with long-duration liabilities like life insurance and annuity products, offering yield premiums above public bonds. However, their complexity and opacity can complicate liability matching, valuation, and regulatory reporting.

Insurers also hold $27 billion in collateral loans within “other invested assets” (Schedule BA), which can boost returns but introduce concentration and counterparty risks, according to the report. The NAIC has tightened disclosure and risk-based capital requirements for these instruments, alongside enhanced guidance for PLRs and offshore reinsurance exposures, reflecting regulators’ focus on protecting policyholder interests.

Implications for the insurance industry

The shift toward private and illiquid assets underscores the balancing act for life insurers -- pursuing higher investment returns while maintaining liquidity and policyholder security.

Firms with large allocations to these assets must manage valuation uncertainty, stress-test portfolios, and maintain capital adequacy to ensure they can meet claims obligations.

Regulatory oversight is intensifying, making robust risk management, transparent reporting, and governance critical for sustaining policyholder confidence.