U.S. life insurers are piling into higher-returning but illiquid and opaque privately placed debt, raising concerns about what happens should they suddenly need to sell the securities.
A Chicago Federal Reserve report found private placements account for over 20% of life insurers’ bond holdings, up from less than 15% in 2017. The increase reflects the recent craze for private assets.
Such securities aren’t publicly offered or registered with the Securities and Exchange Commission, and are sold only to a limited number of accredited investors. Bond credit ratings are usually private too. Public bonds, in contrast, must be registered with the SEC and come with a wealth of supporting information including a prospectus and regular updates to investors.
The report’s authors found privately placed bonds have become more complex, adding to the risk they can’t be sold quickly. One growing area they found is in bonds issued by asset managers to lend to companies or invest in real estate.
Among the larger financial issuers the authors identified through public filings were Madison Capital Funding LLC, an investment vehicle of New York Life that lends to private-equity owned companies, and Cayman Universe Holdings LLC, an affiliate portfolio company of Apollo Global Management, whose bonds are tied to lease payments.
Some investment firms raising money from life insurers are themselves affiliates or offshoots of insurance companies, with experience in direct lending or asset-based financing. Alternative asset managers have targeted insurance to grow assets.
Spokeswomen for New York Life and Apollo’s Athene insurance arm declined to comment.
For insurers, private placements offer longer maturities, diversification, better credit protections and higher returns. Some consultants describe the private bonds as a free lunch for insurers because they offer higher returns but state regulators don’t require extra capital to make up for illiquidity or longer duration.
The report found private bonds change hands far less frequently than public bonds. Such sales are usually directly between insurers rather than through a broker—another strike against being able to sell the bonds if necessary.
“The growing investment in this less liquid asset class… increases the risk of fire sales during times of crisis,” the authors said.
Other researchers have downplayed such risks . They say life insurers are rarely forced to sell assets, because their liabilities are so long-term and customer behavior is largely predictable. Still, regulators have moved to make life insurers hold more capital against some illiquid securities.