It’s All About the Borrow; or Why Life Insurers Are So Important to Private Credit Right Now

As credit market participants are well aware, today’s markets are driven by leverage and in recent years, Wall Street has found a way to invite retail to the party. A growing share of the money backing private credit comes not from banks or CLOs, but from life insurers’ balance sheets, funded by retail annuity buyers and governed by a capital framework, the National Association of Insurance Commissioners’ risk-based capital model, which treats this leverage more favorably than the alternatives.

A Federal Reserve Bank of Chicago working paper found that life insurers have more than doubled their private credit portfolios over the past decade to $849 billion from $386 billion, accounting for 14% of their balance sheets, as of year-end 2024. Importantly, it finds that private equity-owned insurers are the key driving force behind this trend, highlighting that private credit growth accounts for 61% of the share gains private equity-owned insurers have made in the annuity market, while further noting PE-owned insurers have greater access to these investments through affiliated issuers.

One product that has helped this trend is the multiyear guaranteed annuity, or MYGA, which is a fixed annuity product sold by life insurance companies that promises to provide its customers with a guaranteed return over the life of the contract (often three, five, seven or 10 years). This allows insurance companies to lock up this capital for long, predictable periods, subject to early withdrawals (surrenders) and mortality risk on the underlying policyholder. Sales of fixed-rate annuities, which include MYGA products, have almost tripled over the past five years, from about $55 billion in 2020 to almost $161 billion in 2025, according to the Life Insurance Marketing and Research Association.

In the table below, we show hypothetical returns for a private credit portfolio across four different financing mechanisms to illustrate how MYGAs can be used in lieu of more traditional, institutional leverage.

For this illustration, we assume an investor has $1 million of equity to invest in a portfolio of private credit loans paying SOFR+300 bps after fees, expenses and defaults.

Assuming traditional portfolio-level “back leverage” at a 60% LTV with a cost of SOFR+100 bps, the return on equity will increase to over 10%. Using a CLO to generate leverage, equity returns could go up to nearly 13%.
 

However, those are both institutional routes and are going to require negotiations with credit professionals who are likely going to want to see quarterly reports and have discussions with management and the like.

Why should an investor go through that trouble if the opportunity exists to borrow the money from retail clients with much better terms and a similar return on equity to CLOs in the most conservative case? This is the power of MYGAs in providing leverage for credit investments. That gap comes down to how insurance regulators treat this capital.

Under the risk-based capital, or RBC standards, promulgated by the NAIC and followed across most states, insurance companies must hold a certain amount of capital relative to their reserves in order to avoid regulatory action. In this case, the reserves would be the present value of the anticipated stream of payments for the annuitant, which we will assume is the gross premium paid (insurance brokers will get a commission on this product, which we estimate at 4% of face value, although it may be less).

As an example, collateral loans, which are defined by the NAIC as obligations for the payment of money secured by the pledge of a qualifying investment, have an RBC factor of a straight 6.8% (for now). It should be noted that these are explicitly not securities representing a creditor relationship whereby there is a fixed schedule for one or more future payments. Those types of investments, if rated, would have a lower RBC factor than the 6.8%, depending upon the rating assigned to the loans. For the purposes of this illustration and to remain conservative, we will consider this loan portfolio as collateral loans.

Importantly, insurers generally need only one rating from a qualified ratings agency to establish that capital charge, as opposed to a consensus across agencies. That single-rating threshold is key as not all NAIC-recognized raters take the same approach to private credit. For example, Egan-Jones, a smaller Nationally Recognized Statistical Rating Organization, has built a specific niche rating private placements and private credit structures for insurance capital purposes. The NAIC has raised concerns that this dynamic can create an incentive to seek the highest available rating rather than the most appropriate one, and Egan-Jones itself is facing Securities and Exchange Commission scrutiny over its ratings practices.

The RBC factor is higher for those investments that are determined to be between related parties, which has been raised with regard to how the TWG Global-controlled insurance companies have accounted for related-party investments, although no specific findings have been disclosed.

Importantly, the RBC standards used by the NAIC are not that different from the risk weighted asset approach used by U.S. banks wherein the amount of capital to be held against an asset, to be used in calculation of its common equity tier 1 ratio is dependent upon the type of asset. Securitization assets, such as CLO tranches, can have risk weights as low as 20%, while nonsecuritized assets can have a risk weight as high as 100%. This is why CLOs can provide more leverage than back leverage from a bank as the capital charge is lower.

It should also be noted that our analysis above doesn’t get into any of the investment fees that can be charged for managing investments for the insurance company, whether for this particular account or for other insurers (taking advantage of economies of scale).

This funding mechanism has been drawing regulatory attention: life insurers now hold 82% of all insurer CLO investments, with the largest life insurers accounting for about 73% of that total. The NAIC has recently announced an increased level of scrutiny for related-party investment structures and may look to redesign how RBC factors are calculated for private credit collateral, having signaled interest in revisiting the framework more broadly.

For credit investors, it remains an open question whether a capital framework built around traditional bond and mortgage holdings is still fit for purpose now that insurance balance sheets have become a primary funding source for private credit. As well, a key question is whether the regulatory pendulum might swing too far in the other direction, making the current model financially unsustainable.