US life insurers have grown their exposure to private credit and illiquid fixed income assets to $807 billion, representing 20% of the industry's $4 trillion fixed income portfolio, and a new Moody's Ratings report warns that the risks embedded in those holdings are growing in scale, complexity and concentration.
The report, published on June 8, describes the shift as structural rather than cyclical. Private and illiquid bond holdings grew from $685 billion, or 18% of the portfolio, at year-end 2024 to $807 billion at year-end 2025, an increase of $122 billion in a single year.
Moody's further identified four dynamics it considered worthy of close monitoring, namely, concentration risk; a widening credit quality gap relative to the broader portfolio; rising structural complexity through asset-backed securities, and growing payment-in-kind exposure as a potential life-cycle warning signal.
The findings land at a moment of heightened regulatory and investor scrutiny. The US Treasury convened domestic and international insurance regulators earlier this year for talks on risks in the private credit sector, with NAIC president Scott White flagging transparency in life insurance portfolios as a top regulatory priority for 2026. Separately, Barclays found that private credit holdings among US life insurers grew by more than 20% in 2025, with exposure exceeding 15% among some private-equity-affiliated insurers, including Apollo-backed Athene and KKR-backed Global Atlantic.
One of Moody's most pointed observations concerns how unevenly the exposure is distributed. The top 10 life insurers account for $352 billion, or 44% of the industry's $807 billion in private illiquid bonds, yet those same companies held only 24% of total industry fixed income investments.
The credit quality of the illiquid portfolio is also weaker than the industry's broader bond holdings. The private and illiquid portfolio carries 43% in NAIC 2 (Baa-rated) exposures and 9% below investment grade, compared with 36% NAIC 2 and 5% below investment grade for the overall $4 trillion fixed income book. Moody's noted that, in a downside scenario, impairment rates in the private credit segment could exceed those of the liquid portfolio.
A notable feature of 2025 purchase activity is an accelerating move toward asset-backed securities. ABS represented 38% of bonds purchased during the year, compared with only 27% of existing holdings, a gap that signals a deliberate strategic shift rather than passive drift. Moody's describes this migration as moving portfolios toward instruments that are structurally more complex and less transparent, and therefore harder to model and value.
While ABS are not inherently riskier than corporate bonds, they typically involve greater dependence on modelling assumptions and the quality of manager governance, according to the report. Within the ABS bucket, CLOs and RMBS/CMBS dominate, together accounting for the bulk of structured allocations.
Payment-in-kind instruments, in which borrowers defer cash interest payments by issuing additional debt, remain a small portion of life insurer portfolios at 1.1% of statutory surplus, but Moody's flagged the trend as a possible late-cycle indicator.
Proskauer's Private Credit Default Index, which tracks 697 loans totaling $189.2 billion, reported a default rate of 2.73% in the first quarter of 2026, up from 1.84% two quarters earlier, a trajectory that adds weight to Moody's caution on PIK exposure.
Moody's also cautioned that headline PIK measures may understate actual exposure because bonds issued by business development companies and other fund vehicles may not themselves use PIK features even though the underlying portfolio companies do.
The Moody's report arrives as regulators move to close disclosure gaps that have allowed complexity to accumulate in insurer portfolios.
The NAIC's 2025 Principles-Based Bond Definition allowed it to challenge the classification of complex assets, and a near-term increase in defaults would likely accelerate those efforts, potentially resulting in capital charges that reflect a worsening risk environment.
Beginning with year-end 2025 statutory filings, insurers are also required to provide more detailed disclosure on bond holdings, with clearer delineation between issuer credit obligations and structured ABS categories.
Moody's expects corporate lending assets under management in the private credit market to exceed $2 trillion in 2026 and approach $4 trillion by 2030, a trajectory that will keep pressure on life insurers to maintain discipline around governance, stress testing and capital planning as the asset class continues to expand across their balance sheets.
