U.S. life/annuity (L/A) insurers increased private credit holdings by 6% in 2024 with the level doubling over the past decade, according to a new AM Best report.

According to the report, gaps created by traditional bank lenders stepping back from commercial loans have been increasingly filled by nonbank lenders such as private equity and asset manager (PE/AM) firms, leading to more issuance of private credit. At the same time, these types of firms, some of which may originate these assets, continue to enter the L/A market in a variety of ways. “Some examples include outright acquisitions of insurance companies to use as platforms to provide permanent capital and acquire additional blocks of business, or through minority investment or a similar arrangement, to earn fee income from managing large portions of a company’s investment portfolio,” said Jason Hopper, associate director, AM Best.

The increased volume of private credit holdings includes those securities subject to limitations under the Securities and Exchange Commission’s Rule 144a that can be made available to institutional investors, thus enabling an issuer to avoid the path of an initial public offering. In 2024, private placement bonds grew 6.3% to nearly $1.8 trillion, accounting for over 45% of the L/A industry’s bonds, according to the report. By contrast, non-144a private placement holdings, which are less liquid, topped $950 billion in 2024, accounting for 24% of the sector’s bond portfolio and 17% of invested assets.

These private placement holdings take on various forms, including direct lending to corporations and more recently structured non-mortgage-backed securities (non-MBS). Although the bulk of private credit investments are issuer obligations, there has been a steady shift toward structured non-MBS. Private letter rating (PLR) bonds accounted for nearly half of the industry’s private credit investments in 2024. The report also cites a notable difference in credit quality that emerges for structured non-MBS and unaffiliated bank loans for those with a PLR compared with those that have public ratings. According to the report, 54.7% of bank loans without a PLR were rated below investment grade while over 70% of bank loans with a PLR carried an investment grade rating, including 49% classified as NAIC-1.

Structured non-MBS securities are the second largest issuer type and accounted for 28% of private credit holdings in 2024, up from 17% in 2014. Although each of these issuer types have been steadily growing over the last decade, structured non-MBS securities have a compounded annual growth rate of 13% compared to issuer obligations at just 5%.

“Insurers have been investing in private credit for decades, but the type of issuer has continued to shift,” said Kaitlin Piasecki, industry research analyst, AM Best. “Issuer obligations that involves lending directly to companies, now make up less than 60% of private credit allocations, compared to nearly 80% a decade ago.”

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=359097.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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