Over the past several years deploying capital in the insurance capital markets, I’ve found that most coverage rarely goes beyond surface-level headlines, outcomes, and broad narratives. 

This newsletter takes a different approach - a perspective from inside the market - the pricing cycles, the capital flows, what’s moving markets, and what’s behind the headlines.

In the last week the Wall Street Journal reported that the Treasury Department is planning meetings with state insurance regulators about private credit risk piling up on U.S. insurer balance sheets¹. Separately, A.M. Best published a study finding that U.S. annuity insurers' investment portfolios now hold more risky debt than they did in 2007, with a smaller financial cushion².

This recent string of headlines surfaces what many allocators have overlooked for some time; a growing share of what's sold as "insurance return" is really just leveraged private credit with an insurance wrapper.

To take it a step further, the conditions that have made the popular annuity trade profitable are now under scrutiny, forcing investors to reassess long held assumptions about insurance investments.

Over the past 15 years, private equity firms have acquired or built U.S. life insurance and annuity companies. Apollo established Athene. KKR acquired Global Atlantic. Brookfield, Ares, and Blackstone followed.

The mechanics are straightforward. Sell retail fixed annuities - sticky, cheap to service, CD-like. Invest the proceeds in private credit, often originated by the PE parent. Capture the spread. At the largest carriers, roughly a fifth of invested assets now flow into loans to affiliated funds³.

Riskier investment portfolios. Plain-vanilla bond portfolios underlying these contracts have been replaced with private credit, affiliated paper, and illiquid assets. Level 3 assets - those without observable market prices - now account for roughly a third of total assets at firms like Athene and Global Atlantic³.

Hidden leverage. Through affiliated offshore reinsurers in Bermuda and the Cayman Islands, and domestic captives in permissive states like Vermont and South Carolina, U.S. insurers have moved large blocks of policyholder liabilities off their balance sheets⁴. The U.S. parent takes reserve credit while the offshore affiliate disclosures become largely inaccessible to regulators.The result is opacity - a structure where true leverage is difficult to assess.

Private ratings. Of the roughly $6 trillion in U.S. life and annuity invested assets, nearly $1 trillion is now in private credit. More than $419 billion of that debt carries private letter ratings (PLR) that are not publicly disclosed¹. A 2024 study by The National Association of Insurance Commissioners (NAIC) found some of those ratings were as much as six levels above its own assessment⁵. Egan-Jones, the agency most identified with that inflation, is now under SEC investigation⁶.

Duration mismatch. Short-term institutional funding - deposit-type contracts from pension funds and asset managers - has grown rapidly, while the asset side has extended into longer-duration, less liquid investments. In calm markets, the structure is profitable. In stressed ones, it amplifies risk.

The underlying source of return matters more than the label. The first question that should be asked when reviewing any insurance strategy is now: what is the actual source of return? If it's credit spread with leverage on top, you're buying credit - and expect it to move with other credit exposures precisely when you'd want it not to.

Affiliated origination is a signal. When the same firm originates the loans, manages the portfolio, and controls the insurer whose policyholders bear the risk, the economic incentive to keep originating can diverge from the credit cycle.

Reported leverage may differ from real leverage. Offshore reinsurance, domestic captives, and GAAP accounting in place of statutory each play a role. Individually, each is a manageable feature of a sophisticated market. Stacked, they limit the visibility of the leverage actually supporting policyholder promises. Assessing that underlying leverage becomes the core analytical task when sizing exposure.

The capital framework depends on ratings now being questioned.  From 2026, the NAIC can contest any private letter ratings that are three or more notches above its own view and substitute a lower designation for capital purposes - the first real regulatory pushback on PLR-based capital relief. Reported Risk-Based Capital (RBC) ratios at insurers with heavy private-letter-rated holdings may significantly overstate actual capital strength.

The diligence questions have clearly changed. Traditional insurance diligence focused on underwriting discipline, reserving adequacy, and reinsurance programs. For PE-owned U.S. life and annuity exposure, the questions are different: What share of assets are in affiliated loans? What does the unconsolidated reinsurance picture look like? What is held onshore vs. offshore? What portion of the bond portfolio carries private letter ratings, and from which agency?

This is an area I'll be looking closely at in future issues of Hard Market. There's a lot more to unpack: the specific mechanics of how offshore reinsurance obscures leverage, the regulatory responses taking shape across the U.S., Bermuda, and Europe, and what all of this means for the broader insurance capital markets.

Until then.

Charlie Evans, CAIA
Chief Investment Officer, Zephyros Investments

¹ https://www.wsj.com/finance/regulation/insurers-1-trillion-buildup-in-private-credit-is-leaving-regulators-in-the-dust-5f84cad8
² https://www.wsj.com/finance/insurers-take-bigger-risks-than-before-2008-09-crisis-report-warns-dfc611a0
³ https://cepr.net/publications/you-bet-your-life-insurance-private-equity-comes-for-your-annuity/
⁴ https://www.bloomberg.com/graphics/2025-america-insurance-part-1/
⁵ https://content.naic.org/sites/default/files/capital-markets-special-reports-private-ratings-report-statement_1.pdf
⁶ https://www.bloomberg.com/news/articles/2025-11-06/egan-jones-probed-by-sec-over-its-credit-ratings-practices