Holdings, scrutiny of private letter rated bonds continue to climb

The convergence of growth in the private debt markets and US life insurers' search for incremental yield has led to increases in the concentration of private investments in general accounts broadly and bonds associated with private letter ratings issued by nationally recognized statistical rating organizations (NRSROs), more specifically.

Prompted by recent concerns raised regarding the prevalence of private letter rated debt securities and loans, we examined US life insurer investments data through Sept. 30, 2025, to get a better sense of the scope of reliance on private letter ratings for the industry as a whole and among life groups as well as any underlying trends in relative allocations. Our analysis, which is subject to the considerations and limitations discussed in the Methodology section, revealed the following:

➤ Estimated fair value of private letter rated bonds increased to more than $408 billion as of Sept. 30, 2025, from nearly $366 billion as of Dec. 31, 2024.

➤ Despite the significant increase on an absolute basis, the share of private letter rated bonds to total bonds at estimated fair value declined to approximately 11.6% as of Sept. 30, 2025, from 12.1% as of Dec. 31, 2024. Private letter rated bonds constituted 11.6% of the aggregate carrying value of bonds held by US life insurers as of year-end 2024.

➤ While this analysis is focused on industry-level trends, it is important to note that the concentration in private letter rated bonds by the vast majority of US life insurers is either zero or well below industry benchmarks. Many small life insurers and fraternal benefit societies hold minimal, if any, private letter rated bonds. Exposure among managed care-focused companies with large life subsidiaries also was relatively minimal or nonexistent.

➤ Private letter rated investments accounted for 9.7% of all bonds acquired in the third quarter by US life insurers, or nearly $30 billion in the aggregate at actual cost. Of those, 94.7% had NAIC designations and modifiers equivalent to an S&P equivalent investment-grade rating of BBB- or higher.

Methodology

The application of private letter ratings to specific securities is disclosed in the Securities Valuation Office (SVO) administrative code field in the annual investment schedules of NAIC statutory filings as well as in connection with acquisition of specific securities in quarterly filings. These ratings, subject to certain requirements, are included by the SVO in the filing exemption process and form the basis for an NAIC designation, which in turn determines the risk-based capital charges applied to individual investments.

While the SVO requires the submission of rating rationale reports in connection with insurance company investments in securities with private letter ratings, those reports — and other aspects of the private letter rating process — remain confidential. Apollo Global Management Inc., for example, provided a breakdown of its utilization of specific NRSROs in a November presentation focused on its Athene Holding Ltd. subsidiary, but this information can only be obtained at the discretion of the insurer and is not part of publicly accessible statutory filings.

Any evaluation of investment concentration of bonds with private letter ratings is best conducted using annual statutory filings, given comprehensive disclosures at the individual security level of carrying values, fair values and various other datapoints for acquisitions and holdings. Quarterly statements only include security- and loan-level detail on acquisitions and disposals, including paydowns, but given the steadily increasing exposure to private investments among life insurers, relying solely on year-old disclosures may prove insufficient.

Mindful of those limitations, we utilized the conditional fair value field (referenced in this article as estimated fair value) in the Insurance Investment Holdings data set on S&P Capital IQ Pro to provide an approximation of holdings on an interim basis as of Sept. 30, 2025, on a sum-of-the-parts basis. The field uses the combination of prior-year-end fair value disclosures where applicable with the addition of the actual cost of any acquisitions disclosed in quarterly filings less the consideration received in conjunction with any divestitures and paydowns. The field does not provide updates of year-end 2024 fair value marks, hence each entry at the security and loan levels should be viewed as an estimation. In the event that a holder has not engaged in any trading activity in a security or loan during the first three quarters of 2025, the year-end 2024 as-reported fair value remains unchanged. All told, this analysis involved 650,000 rows of data.

Notably, we omitted from our analysis for all periods those life groups for which third-quarter 2025 data has either not been compiled by S&P Global Market Intelligence or is unavailable. Most prominent among the exclusions is the primary US life subsidiary of Prudential Financial Inc.

Additionally, we have geared this analysis to focus on industry-level trends given certain limitations associated with the underlying data. Our primary rationale for that narrower approach is that the broader use of coinsurance and modified coinsurance with funds withheld agreements across the industry have blurred the lines between the legal and economic ownership of invested assets such that certain private letter rated securities under an insurer's legal control may reflect allocations made by and accruing to the benefit of a reinsurer. Security- and loan-level data regarding private letter rated investments at the individual entity and group levels is available through S&P Capital IQ Pro and upon request.

Findings

The industry's increased investment in private securities and loans that may provide liquidity and/or complexity premia relative to more traditional holdings, such as investment-grade corporate bonds, has emerged in recent years in reflection of both macro trends and developments specific to the life and annuity business.

The need to offer competitive products in the rapidly growing annuity market, for example, has increased the importance of producing higher investment yields at a time spreads on certain more traditional assets have tightened. Alternative asset managers that engage in various forms of private origination have attained heightened prominence in the industry through both acquisitions of life insurers and entry of sizable third-party investment management agreements. As a result, the composition of insurers' portfolios overall and specific to bonds has evolved considerably with a greater focus on alternatives such as limited partnership interests, warehouse lines of credit, direct middle-market lending, rated-note feeder funds, nonagency residential mortgage whole loans and a wide array of structured finance securities. These strategies may be accentuated when analyzing individual insurers' portfolios by the broader use of funds withheld reinsurance structures.

Multiple slides in Apollo's Retirement Services Business Update presentation on Nov. 24 underscored the extent to which coverage of life insurers' investments in private markets and use of private letter ratings has advanced in recent months. Apollo sought to provide reassurance with statistics regarding the prevalence of Athene's use of two or more ratings as well as ratings issued by the SVO and/or prescribed NAIC criteria. It also indicated that 9% of Athene's net invested assets had a private letter rating, of which 98% were considered investment grade. Our methodology, subject to the limitations discussed in the Methodology section, estimates private letter rating allocation of approximately 9.9% among Athene's US life subsidiaries.

Their largest holdings of private letter rated bonds involved positions in investment-grade asset-backed-securities debt issued by AP Grange Holdings LLC, Apollo Multi-Asset Prime Securities (AMAPS) 1 LLC and Fox Hedge LP, which Athene classified as single entity-backed, equity-backed and other asset-backed securities, respectively, under the NAIC's new issuer type framework. At the industry level, acquisitions of private letter rated bonds were most prevalent as a share of total in-category purchases during the first nine months of 2025 in equity-backed, project finance, other not-self-liquidating ABS and other non-financial ABS.

Apollo further argued that confidentiality represents the sole difference between public and private ratings, saying they have the same cost, involve the same analytical rigor and that their utilization often is due to tax, structural and competitive considerations among various counterparties. But public perceptions regarding the implications of private letter rating utilization, perhaps amplified by the necessary associated opacity, may not be fully aligned with that explanation as highlighted by questions that arose during several third-quarter earnings conference calls.

MetLife, Inc. executives, when asked about private letter ratings during a Nov. 6 conference call, offered positive commentary about the overall credit environment and emphasized the company's reliance on investment underwriting conducted by MetLife Investment Management LLC, which has longstanding experience managing private assets through cycles.

"Our primary source of credit underwriting is the own work we do," said Chief Investment Officer Charles Scully. "It's not rating agencies. It's not a rating letter. It's our specific underwriting."

F&G Annuities & Life Inc. CEO Christopher Blunt said that his company has been seeking to obtain ratings from multiple NRSROs when possible.

"It's always better to have two," he said during a Nov. 7 conference call, adding that "I think we've made a ton of progress there."

Outlook

We would anticipate further regulatory proposals related to these investments to emerge in 2026. Key to those initiatives will be the NAIC's creation of a new Invested Assets Task Force to replace the Valuation of Securities Task Force. It will have three underlying working groups: the Invested Assets Working Group, the Investment Designation Analysis Working Group and the Investment Designation Analysis Working Group.

Prior to its forthcoming dissolution, the Valuation of Securities Task Force adopted revisions to the Purposes and Procedures Manual of the NAIC Investment Analysis Office to further clarify what private letter rating rationale reports should contain and to provide a means for the SVO to address any shortcomings. The manual now states that the reports must "include sufficient analytical content to enable an independent party to form a reasonable opinion of the basis for the [private letter credit rating provider's] assessment of investment risk." To the extent the SVO determines that they contain insufficient analytical content, it may issue a request to the filer for additional information. The SVO can reject the filing if it deems that request has not been fulfilled.

Additionally, the scope of disclosure by Athene relative to the concentration of private letter rated bonds in its general accounts and share of private letter ratings from specific NRSROs may prompt further voluntary disclosures by the company's publicly traded peers to offer similar color.

With a heightened focus on insurance company exposure to private investments among regulators, investors, rating agencies and other interested observers, the push for additional transparency will continue to emerge.