Moody’s Ratings, the credit ratings agency, has reported that US life insurers are increasing their exposure to private credit and other illiquid fixed-income assets, creating heightened liquidity, concentration and credit risks across the sector.
According to Moody’s Ratings, US life insurers’ exposure to private credit and illiquid fixed-income assets is increasing in scale, complexity and concentration, with the trend appearing structural rather than cyclical.
These holdings reached $807 billion, representing 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 stated that risks are emerging, particularly within middle-market direct lending, driven by weakening credit quality and increasing borrower stress.
Moody’s Ratings identified four developments that warrant close monitoring. The agency noted that concentration risk is increasing, with the 10 largest holders accounting for 44% of the industry’s $807 billion in private illiquid bonds, creating significant exposure to valuation uncertainty and potential liquidity pressures.
The agency also observed that the credit quality gap is widening, with the illiquid portfolio displaying weaker credit characteristics than broader public fixed-income portfolios. The agency highlighted that the growing shift towards asset-based lending is increasing structural complexity, while payment-in-kind (PIK) exposure, although still relatively modest, continues to rise and may serve as a late-cycle warning indicator.
Moody’s defines private credit as non-bank lending. While lending activity was historically concentrated among private-equity-backed middle-market companies, the market has expanded in response to growing institutional demand for long-duration, higher-yielding and high-quality assets.
The asset class now includes real estate debt, infrastructure debt and asset-based finance. Within asset-based finance, private asset-backed securities and fund finance are emerging as significant growth areas, including data centre and fund finance securitisations. For insurers, Moody’s includes commercial real estate loans, such as mortgage lending, and traditional private placements within its definition of private credit.
The agency reported that North American life insurers maintain substantial allocations to private credit, representing 36.8% of total investments. However, growth is increasingly extending beyond traditional direct lending into asset-based finance and specialist market segments.
Moody’s stated that the reported exposure remains predominantly investment grade and includes conventional insurance assets such as commercial mortgage loans and private placements. Exposure is more limited under narrower definitions of private credit, such as direct middle-market lending and certain asset-based finance strategies, although incremental capital is increasingly being directed towards more complex and opportunistic investments.
According to Moody’s, life insurers already have significant exposure to private credit, which may moderate future growth rates. Nevertheless, insurers are expected to continue increasing allocations to collateralised and structured assets that better align with long-term liabilities, despite the greater structural complexity these assets can introduce.
Moody’s analysed industry bond holdings at the end of 2025 and found a continuing increase in allocations to private credit-related and illiquid asset classes. The agency attributed this trend to a combination of structural and cyclical factors, including sustained demand for higher risk-adjusted yields during a period of elevated but volatile interest rates, as well as the growing availability of privately originated 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 customise risk, duration and collateral profiles while reducing dependence on syndicated markets.
To assess exposure levels, Moody’s examined Schedule D fixed-income holdings classified as Level 3 and those carrying NAIC designations of “PL” or “Z”. At the end of 2025, PL-rated investments totalled $483 billion, representing 12% of total bond holdings. Z-rated investments amounted to $81 billion, or around 2% of total bonds.
Remaining Level 3 holdings not carrying PL or Z designations totalled $242 billion, equivalent to 6% of bonds. Combined, these categories represented approximately $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 increasing as private credit markets expand in both scale and scope. The agency pointed to large infrastructure and asset-based financing transactions linked to energy transition projects, digital infrastructure and transport assets as key contributors to the growing supply of long-dated private investments.
While these assets may enhance yields and diversification, Moody’s said their continued expansion heightens exposure to valuation uncertainty, concentration risk and liquidity management challenges, increasing the importance of governance, stress testing and capital planning.
The agency also highlighted growing concentration within the market. According to Moody’s Ratings, the largest 10 US life insurers account for $352 billion, or 44%, of the industry’s $807 billion in private illiquid bond holdings. By comparison, these same insurers hold 24% of total industry fixed-income investments.
Moody’s stated that, despite broader industry growth, a relatively small group of insurers continues to account for a disproportionately large share of PL-rated, Z-rated and Level 3 assets.
In its assessment of credit quality, Moody’s found that private and illiquid bond portfolios exhibit weaker credit characteristics than the wider industry fixed-income portfolio. As of year-end 2025, 91% of the $807 billion private and illiquid investment portfolio carried a Securities Valuation Office designation equivalent to investment grade. However, only 49% was rated NAIC 1 (Aaa–A), while 43% was rated NAIC 2 (Baa) and 9% was below investment grade.
By comparison, Moody’s reported that the wider $4 trillion fixed-income portfolio was 95% investment grade, with 59% rated NAIC 1, 36% rated NAIC 2 and only 5% below investment grade. Excluding the private and illiquid investment segment, the remaining $3.2 trillion fixed-income portfolio demonstrated stronger overall credit quality. Moody’s said the greater concentration in weaker credit categories highlights the elevated credit risk embedded within private and illiquid investments.
The agency’s analysis showed that the composition of private and illiquid asset portfolios remains heavily weighted towards issuer-level credit risk. Of the $807 billion portfolio, 64% consists of issuer credit obligations, including corporate debt, loans, project finance and obligations issued by real estate investment trusts and business development companies. The remaining 36% is allocated to asset-backed securities (ABS).
Moody’s stated that asset-backed securities are not inherently riskier than corporate bonds but typically involve greater structural complexity and lower transparency. As a result, valuation often relies more heavily on modelling assumptions and governance frameworks.
The agency also noted a shift in new investment activity. During 2025, insurers purchased approximately $2 trillion of bonds, with issuer credit obligations accounting for around 62% and ABS representing 38%. This compares with the existing bond portfolio, where issuer credit accounts for 73% and ABS 27%. Moody’s Ratings said this trend points to a growing allocation towards ABS, particularly within private credit-related structures.
According to Moody’s, issuer credit investments continue to provide scale, liquidity and duration, while ABS investments are increasingly being used to enhance yield and support asset-liability matching. The agency stated that the growing share of ABS, combined with concentration in collateralised loan obligations and mortgage-related sectors, reflects a structural shift towards more complex forms of credit intermediation, with implications for valuation transparency, liquidity management and performance across credit cycles.
Moody’s further reported that ABS exposures are generally concentrated in senior secured positions, offering greater structural protection than issuer-level credit exposures. By contrast, issuer credit obligations are predominantly senior unsecured, increasing sensitivity to issuer leverage, covenant quality and recovery outcomes during periods of stress.
The agency also examined payment-in-kind exposure and found that it remains moderate at 1.1% of statutory surplus. Moody’s Ratings stated that the increase appears linked to evolving structures within segments of the private credit market rather than representing a significant shift in insurers’ overall investment strategies. However, the agency cautioned that headline PIK figures may understate underlying risks because certain investment vehicles may contain PIK-generating assets even when the directly held securities do not incorporate PIK features.
While current levels are not viewed as materially affecting balance sheets, Moody’s said ongoing monitoring remains important because PIK exposure can increase during more challenging market conditions. The agency identified Resolution Life US, Genworth, Security Benefit, Wilton Re and Sammons among the insurers reporting the highest PIK balances relative to statutory surplus at the end of 2025.
Overall, Moody’s Ratings concluded that the growing role of private credit and illiquid assets in US life insurers’ portfolios is creating greater exposure to concentration, liquidity and valuation risks.
Although these investments can provide higher yields and support long-term liability matching, the agency said their increasing scale and complexity reinforce the need for robust governance, stress testing and capital management practices across the sector.
