Private Credit and U.S. Insurers

The Core Story

Private credit is not new to insurers. U.S. insurers have participated in private markets for decades, including direct lending and private placements. What has changed is the breadth and structural complexity of the market. The NAIC describes a market that has expanded beyond relatively straightforward borrower exposure into privately rated bonds, middle-market CLOs, BDCs, private credit funds, rated feeder structures and other alternative-credit exposures.

That evolution creates a central tension: private credit can offer insurers additional spread and yield, but the same features that can create an attractive return premium - illiquidity, opacity, bespoke structures and complexity - also place greater demands on underwriting, valuation, liquidity management, capital analysis and regulatory oversight.
 

Key Facts

How the NAIC Defines the Exposure

The report emphasizes that there is no single market-wide definition of private credit. For its analysis, the NAIC focuses on five categories and removes identifiable overlap when aggregating them:

• Private placement bonds
• Bonds with private letter ratings
• Bank loans and direct lending
• Middle-market CLOs
• Business development companies (BDCs) and private credit funds

This definitional issue is important. Estimates of the overall U.S. private-credit market can vary materially depending on which instruments are included, and the NAIC itself characterizes its insurer exposure figures as best estimates based on current reporting requirements and available data.

Private Placements and Privately Rated Bonds

Private placements are long-established tools in insurance portfolios. The report distinguishes those familiar exposures from a newer concern: privately rated bonds that may incorporate alternative underlying assets or more complicated structures. Private letter ratings are confidential and generally available only to the issuer and specified investors, reducing the amount of independent public information available to assess collateral, deal terms, structural features and transaction mechanics.

The NAIC notes two initiatives intended to reduce reliance on credit-rating-provider ratings alone: authority for regulators and the Securities Valuation Office to challenge ratings viewed as unreasonable reflections of risk, and development of a credit-rating-provider due-diligence framework.

Direct Lending: Old Insurance Activity, New Scale

The report traces insurer direct lending back to the 1980s and notes that insurers expanded participation after banks tightened lending standards following the Global Financial Crisis. Direct lending differs from broadly syndicated lending because loans are privately originated and negotiated, generally held to maturity, and can offer more flexible execution. In return for taking borrower risk and accepting illiquidity, lenders may receive higher interest rates and an illiquidity premium.

The NAIC cites market data showing direct lending represented more than half of global private-credit AUM by September 2025, compared with roughly 18% in 2010. That scale helps explain why private credit has become a central issue for insurers, asset managers and regulators rather than a niche allocation.

PIK: A Useful Feature and a Warning Signal

Payment-in-kind (PIK) provisions allow interest to be added to principal rather than paid in cash. The report makes an important distinction: PIK can be intentionally built into a loan to preserve cash for growth, or it can be introduced later when a borrower is unable to meet cash-interest obligations.

For insurers, this matters beyond borrower credit quality. A portfolio containing multiple PIK exposures can reduce expected cash inflows and therefore affect asset-liability management. The report also warns that PIK can delay the recognition of deterioration because a borrower may avoid a payment default even while leverage and financial stress increase.

What the Current Credit Data Say

The report does not portray private credit as being in broad distress. It states that private-credit non-accruals in the third quarter of 2025 were below their 10-year averages when measured at both cost and fair value. It also cites research indicating that default rates had remained relatively stable in recent years, although borrowers with EBITDA between $25 million and $50 million showed higher defaults than smaller and larger cohorts in the cited data.

At the same time, the report points to a potentially important feature of recent defaults: distressed exchanges and PIK have represented a meaningful portion of default activity, and 40% of default actions in 2025 involved issuers that had previously experienced a default action.

The Unanswered Question

The NAIC’s closing point is important. Much of private credit’s rapid growth has occurred during a period of abundant liquidity, relatively strong economic conditions and comparatively low default rates. Consequently, the market—particularly exposures involving alternative underlying assets and more complex structures—has not yet been tested through a prolonged, fully stressed credit cycle.

Questions for Insurance Investors

• Can the insurer see through the structure to the underlying economic risk?
• Is the incremental spread sufficient compensation for illiquidity, opacity and complexity?
• How much of reported income is cash versus PIK?
• How should liquidity and asset-liability management change as private exposures increase?
• Does the insurer have sufficient internal expertise to independently challenge ratings, valuations and manager assumptions?
• What happens to the portfolio—not merely an individual asset—under a sustained stressed credit cycle?

The important question is not whether private credit belongs in insurance portfolios. It already does, at substantial scale. The more consequential question is whether underwriting, governance, reporting and portfolio construction are keeping pace with the market’s evolution.

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Source
National Association of Insurance Commissioners, Capital Markets Bureau, “Private Credit Analysis of the U.S. Insurance Industry,” 2026.