(Bloomberg) --Life insurance companies owned by private equity firms have quietly reshaped their portfolios, piling into higher-yielding alternative credit in a shift that's entangled the industry with the broader financial system, according to researchers at the Federal Reserve Bank of Chicago.
Private fund giants, including Apollo Global Management Inc. and KKR & Co., have snapped up life insurers over the past decade, changing how they invest. From 2017 to 2024, PE-owned insurers' investments in private placements for asset-backed securities and financial borrowers jumped to 8% of assets from 2%, as those of stand-alone insurers rose to 4% from 3%, the study showed.
Those changes expose insurers to more liquidity risk, the researchers said.
"This new trend in private placements lending indicates that life insurers have become intertwined with the broader private credit ecosystem," authors Ralf Meisenzahl, Jackson Overpeck and Andy Polacek wrote. (The views expressed are the researchers' own and not of the Chicago Fed or the US central bank.) "A sector that traditionally financed large corporates and infrastructure is now extending credit to other financial intermediaries and structured vehicles."
Apollo and KKR declined to comment.
The study shines a light on the growing entanglement between the insurance sector and the broader financial system. It's a tie-up that threatens to leave insurers vulnerable if there's broader credit stress. So far, defaults have remained low and most of the private placements are rated investment-grade.
As of 2024, PE-owned insurers represented just 14% of industry general account assets, but accounted for over 40% of financial and ABS private placements, the study found. Amid a relatively benign credit environment, life insurers have been pouring more money into private assets and in the process, expanding the kind of private placements they invest in.
Private placements accounted for 14% of life insurers' total general account assets in 2024, up from 10% in 2014, the study also found. Even with the increase, that's still a relatively small slice of an insurance firm's overall portfolio. The extent to which this lending is causing firms to become systemically integrated with the broader financial system is still limited, Meisenzahl said in an interview with Bloomberg.
The researchers also conducted a
Private placements aren't new. Life insurance firms have long invested in the debt, a form of direct lending with fewer required securities filings than required in public debt deals. Corebridge Financial Inc., Jackson Financial Inc. and Hartford Insurance Group Inc. all touted their private placements holdings during first-quarter earnings reports.
Investments in financial and ABS private placements — which generally pay higher spreads — allowed the PE-owned life insurers to capture annuity market share over the last decade, the researchers said.
Some of the largest borrowers of financial and ABS private placement debt include Madison Capital Funding, a New York Life subsidiary focused on direct lending to private equity-backed middle-market companies and direct lending affiliates of MassMutual Life, the researchers found. Even the National Basketball Association has borrowed via Hardwood Funding LLC, its league-wide credit facility that issues debt backed by NBA media revenue, showing how deeply private placements reach.
Taken together, the changes "increase the systemic importance of life insurers and calls for additional research examining private placements," they concluded.
