Credit rating agency Moody’s Ratings reported that U.S. life insurance companies are increasing their investments in private credit and other illiquid fixed income assets, leading to increased liquidity, concentration and credit risk across the industry.
According to Moody’s Ratings, U.S. life insurers’ exposure to private credit and illiquid fixed income assets is increasing in size, complexity and concentration, and this trend appears to be structural rather than cyclical.
Those assets reached $807 billion, or 20% of the industry’s $4 trillion fixed-income portfolio, compared with $685 billion, or 18%, a year earlier. Based on its recent analysis of private credit markets, Moody’s Ratings said risks are emerging due to declining credit quality and increasing borrower stress, particularly in the middle-market direct lending space.
Moody’s Ratings identified four developments that deserve close attention. The agency noted that concentration risks are increasing, with the 10 largest holders accounting for 44% of the industry’s $807 billion in illiquid private bonds, creating significant risks of valuation uncertainty and potential liquidity pressures.
The agency also observed that the credit quality gap is widening, with illiquid portfolios having weaker credit characteristics than broader public fixed income portfolios. The agency highlighted that the increasing shift to asset-based lending is increasing structural complexity, while payments-in-kind (PIK) risks, while still relatively small, continue to rise and may serve as warning indicators later in the cycle.
Moody’s defines private credit as non-bank loans. While lending activity has historically been concentrated in private equity-backed middle market companies, the market has expanded amid growing institutional demand for long-term, high-yield and high-quality assets.
The asset class now includes real estate debt, infrastructure debt and asset finance. Within asset finance, private asset-backed securities and fund finance are emerging as important growth areas, including data center and fund finance securitizations. For insurers, Moody’s includes commercial real estate loans (such as mortgages) and traditional private placements in its definition of private credit.
The agency reported that North American life insurance companies maintain a large allocation to private credit, accounting for 36.8% of total investments. However, growth is increasingly moving beyond traditional direct lending into asset finance and specialist markets.
Moody’s said reported exposures remain primarily investment grade and include traditional insurance assets such as commercial mortgages and private placements. While incremental capital is increasingly flowing into more sophisticated and opportunistic investments, exposures are more limited under the narrow definition of private credit, such as direct middle market lending and certain asset-based financing strategies.
Life insurers already have large amounts of private credit, which could slow future growth rates, Moody’s said. Nonetheless, insurers are expected to continue increasing allocations to mortgage and structured assets to better align with longer-term liabilities, although these assets may bring greater structural complexity.
Moody’s analyzed industry bond holdings through the end of 2025 and found that allocations to private credit-related and illiquid asset classes continued to increase. The agency attributes the trend to a combination of structural and cyclical factors, including continued demand for higher risk-adjusted yields during a period of rising but volatile interest rates, and growing private credit opportunities.
The agency noted that insurers are increasingly accessing these investments through direct origination platforms, strategic partnerships with asset managers and affiliated asset management structures. Moody’s Ratings said these approaches allow insurers to tailor risk, tenor and collateral profiles while reducing reliance on the syndication market.
To assess the level of risk exposure, Moody’s reviewed Schedule D fixed income assets classified as Level 3 and assets designated as “PL” or “Z” by the NAIC. As of the end of 2025, PL-rated investments totaled $483 billion, accounting for 12% of total bond holdings. Class Z investment amounts to $81 billion, accounting for approximately 2% of total bonds.
Remaining Level 3 holdings not designated PL or Z total $242 billion, equivalent to 6% of the bonds. Together, these categories account for about $807 billion, or 20%, of the industry’s $4 trillion fixed income portfolio, compared with $685 billion, or 18%, in 2024.
Moody’s expects allocations to continue to increase as the private credit market expands in size and scope. The agency cited large-scale infrastructure and asset finance transactions related to energy transition projects, digital infrastructure and transport assets as key factors in the growing supply of long-term private investment.
Moody’s said that while these assets may enhance yields and diversification, their continued expansion increases the risk of valuation uncertainty, concentration risk and liquidity management challenges, thereby increasing the importance of governance, stress testing and capital planning.
The agency also highlighted increasing market concentration. According to Moody’s Ratings, the 10 largest life insurance companies in the United States hold illiquid private bonds of US$807 billion, of which US$352 billion, accounting for 44%. By comparison, these insurers hold 24% of the industry’s total fixed income investments.
Moody’s said that despite broader industry growth, a relatively small group of insurers still account for a disproportionately large share of PL, Z and 3 assets.
In its assessment of credit quality, Moody’s found that the credit characteristics of the private and illiquid bond portfolios are weaker than those of the broader industry fixed income portfolio. At the end of 2025, 91% of the $807 billion private and illiquid portfolio had an OSV designation equivalent to investment grade. However, only 49% are rated NAIC 1 (Aaa–A), 43% are rated NAIC 2 (Baa), and 9% are rated below investment grade.
By comparison, Moody’s reports that the broader $4 trillion fixed income portfolio is 95% investment grade, with 59% rated NAIC 1, 36% rated NAIC 2 and only 5% rated below investment grade. Excluding the private and illiquid investment components, the remaining $3.2 trillion fixed income portfolio exhibits stronger overall credit quality. Moody’s said greater concentration in weaker credit categories highlighted elevated credit risks in private and illiquid investments.
The agency’s analysis shows that the composition of private and illiquid asset portfolios remains heavily skewed towards issuer-level credit risk. Of the $807 billion portfolio, 64% consists of issuer credit debt, including corporate debt, loans, project finance and debt issued by real estate investment trusts and business development companies. The remaining 36% is allocated to asset-backed securities (ABS).
Moody’s said asset-backed securities are not inherently riskier than corporate bonds, but often have more complex structures and less transparency. Therefore, valuations are often more dependent on modeling assumptions and governance frameworks.
The agency also noted a shift in new investment activity. In 2025, insurance companies purchased approximately $2 trillion in bonds, of which issuer credit debt accounted for approximately 62% and ABS approximately 38%. This compares with 73% of the existing bond portfolio in issuer credit and 27% in ABS. Moody’s Ratings said the trend points to increasing allocations to asset-backed securities, particularly in private credit-related structures.
Moody’s said issuer credit investments continue to provide scale, liquidity and duration, while ABS investments are increasingly used to enhance yields and support asset-liability matching. The agency said the growing share of ABS, coupled with concentration in mortgage obligations and mortgage-related industries, reflects a structural shift toward more complex forms of credit intermediation, which has implications for valuation transparency, liquidity management and performance throughout the credit cycle.
Moody’s further reports that ABS exposures are typically concentrated in senior secured positions, which provide greater structural protection than issuer-level credit exposures. In contrast, issuer credit debt is primarily senior unsecured, with increasing sensitivity to issuer leverage, covenant quality and recovery outcomes during periods of stress.
The agency also examined in-kind payments exposure and found it remained modest at 1.1% of statutory surplus. Moody’s Ratings said the increase appears to be related to the evolution of the internal structure of private credit markets and does not represent a major shift in the insurer’s overall investment strategy. However, the agency warned that overall PIK figures may underestimate potential risks because some investment vehicles may contain PIK-generating assets even if directly held securities do not contain PIK features.
Moody’s said that while current levels will not have a material impact on balance sheets, ongoing monitoring remains important as PIK exposures could increase in more challenging market conditions. The agency noted that Resolution Life US, Genworth, Security Benefit, Wilton Re and Sammons were the insurers reporting the highest end-2025 PIK balances relative to statutory surpluses.
Overall, Moody’s Ratings concludes that the growing role of private credit and illiquid assets in U.S. life insurance company portfolios results in increased concentration, liquidity and valuation risks.
While these investments can provide higher yields and support long-term liability matching, the agency said their increasing size and complexity reinforces the need for robust governance, stress testing and capital management practices across the industry.
