US Life Insurers Held $807 Billion of Hard-to-Sell Credit

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(Bloomberg) — US life insurers held about $807 billion of the most illiquid kind of fixed-income instruments last year, according to a new study by Moody’s Corp., raising concern about overall liquidity and concentration of assets in the sector. 

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Such holdings reached 20% of the life insurance industry’s $4 trillion fixed-income portfolio at the end of 2025, up from 18% the year before, according to the report released Monday. The securities used for those calculations bore private-letter ratings, didn’t carry a formal rating assigned by a third-party firm or couldn’t be valued with observable market prices. 

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Credit ratings are a crucial element of the insurance industry’s financial stability, as they dictate the amount of capital carriers need to set aside to keep their promises to policyholders, which can sometimes stretch decades into the future. 

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“The increase is driven by both structural and cyclical factors, including sustained demand for higher risk-adjusted yields amid elevated but volatile interest rates, and the expanding availability of privately originated credit,” the Moody’s analysts, led by Manoj Jethani, said in the report.

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Insurers are facing scrutiny from regulators about their growing stakes in alternative investments, including private credit. The Treasury Department has met with state regulators, who directly oversee the industry in the US, to discuss insurers’ exposure to the asset class. 

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Allocation to illiquid assets by insurers is expected to keep increasing as the universe of private credit, which finances anything from large-scale energy projects to hyper-scalers’ data centers, continues to expand. While these investments allow insurers to diversify their books and reap higher yields, they also increase exposure to uncertain valuations and liquidity management issues. 

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On average, those investments have lower credit quality than the industry’s overall fixed-income holdings, according to Moody’s. About 43% of the illiquid portfolios were assigned grades in the three lower rungs of investment grade, compared with 36% for the broader portfolio. About 9% of the illiquid portfolio was junk-rated.

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These illiquid investments were heavily concentrated across the life insurance industry, with the top 10 carriers holding 44% of the industry’s exposure, while the same firms held only about 24% of the industry’s total fixed-income portfolio.

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Private-letter ratings have been in the spotlight over the past year, as executives, regulators and lawmakers have raised concerns about their role in the growth of the $1.8 trillion private credit market. Unlike public ratings, private-letter ratings aren’t widely disseminated. Egan-Jones Ratings Co., one of the main providers of such ratings, was probed by the US Securities and Exchange Commission last year and later taken off the list of approved firms by the Bermuda Monetary Authority.

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Investments bearing such ratings, at $483 billion, represented 12% of the US life insurance sector’s fixed-income portfolio last year.

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