Insurance Giants Face Scrutiny Over Private Credit and Liquidity Risks

Two of the largest U.S. life insurers, Delaware Life Insurance Company and Clear Spring Life and Annuity Company, have revised their 2025 financial filings to reveal more than $20 billion in investments tied to related parties. Delaware Life's updated report now classifies $17 billion-about 39% of its invested assets-as related-party holdings, a dramatic increase from the $1.4 billion previously reported. Clear Spring's correction added another $4.6 billion. Both companies are linked to financier Mark Walter, and the disclosures have drawn the attention of federal authorities, including grand jury subpoenas from the U.S. Attorney's Office for the Southern District of New York and a parallel inquiry by the Securities and Exchange Commission.

Private Credit Exposure

These corrections highlight how life insurers have become major players in the private credit market, often holding long-dated, illiquid loans that do not trade on public markets. Private credit typically involves loans negotiated outside traditional bond markets, with custom terms and limited transparency. While state insurance regulations allow transactions with related entities, the scale and opacity of these holdings make it difficult for regulators and policyholders to assess the true risk. The National Association of Insurance Commissioners (NAIC) has noted that private-equity-owned insurers now control $704.3 billion in assets, with life insurers making up 96% of that group. Structured and asset-backed securities account for a much larger share of their portfolios compared to the broader industry.

Liquidity and Valuation Risks

Unlike banks, life insurers match long-term liabilities with long-term assets, but policyholders, derivatives counterparties, and institutional lenders can still demand cash on short notice. Illiquid private loans may be marked as investment grade, but their actual sale value can drop sharply in stressed markets. The NAIC found that 96% of bonds held by private-equity-owned insurers carried top ratings, but these ratings often rely on models and information supplied by affiliated managers. Bloomberg reported that Egan-Jones Ratings Company was the sole known rating provider for a significant portion of Delaware Life's and Clear Spring's bond portfolios, with related companies paying the firm millions since 2024. This concentration of ratings and the lack of independent price discovery increase the risk that reported solvency may not reflect real-world liquidity.

Regulatory Response and Market Impact

Federal Reserve research shows that life-insurer-affiliated managers now oversee a large share of syndicated and middle-market loans, often through complex structures like collateralized loan obligations (CLOs). The Fed's May 2026 financial-stability report estimated that life insurers' nontraditional liabilities reached $531 billion in late 2025, up 15% year-over-year. Illiquid investments made up about 37% of life-insurer assets in 2024. The NAIC has responded by requiring more detailed disclosures and rationale reports for private ratings, and Delaware Life has agreed to swap up to $6.5 billion in affiliate-dependent assets for non-affiliated ones, pending regulatory approval. The companies maintain that their capital and liquidity positions remain strong, with Delaware Life reporting $70.5 billion in admitted assets and $4 billion in capital and surplus as of June 30, 2025.

Recent events in Europe underscore the risks. Italy's Eurovita saw its solvency ratio plunge from 230% to 130% in 2022 as bond losses and policy surrenders accelerated, leading to a temporary freeze on redemptions and a transfer of policies to other insurers. As the private credit market expands, U.S. regulators are watching for similar vulnerabilities. The risk is that a sudden wave of policy surrenders, collateral calls, or maturing advances could force insurers to sell illiquid assets at steep discounts, potentially triggering a liquidity crunch. This dynamic echoes concerns raised in other parts of the financial system, such as when major crypto exchanges wound down operations amid shifting institutional flows.

According to NAIC data for year-end 2024, there were 137 U.S. insurers owned by private-equity firms, up from 90 in 2018. These firms held $704.3 billion in cash and invested assets, representing 7.8% of the $9 trillion total U.S. insurer assets. Structured and asset-backed securities made up 31% of bonds at private-equity-owned insurers, compared to 13% for all insurers, totaling nearly $133 billion. The Fed's May 2026 report noted a 15% real increase in nontraditional liabilities for life insurers over the prior year, reaching $531 billion by late 2025.

Private credit's appeal for insurers lies in its higher yields and the ability to match long-term liabilities with long-term assets. But the growing use of affiliated managers, reliance on internal ratings, and the concentration of illiquid assets create a complex risk profile. If multiple cash demands hit at once, insurers could face a scenario similar to a bank run, with policyholders, counterparties, and lenders all seeking liquidity faster than assets can be sold. As the sector's exposure to private credit deepens, both regulators and market participants are reassessing how these risks could ripple through the broader financial system.