US life insurers have been increasing their exposure to less liquid, higher-yielding assets as they seek to boost returns and better match long-dated liabilities, according to a report from Morningstar DBRS.
The trend has been sharpening regulatory focus on liquidity and capital, but has not yet led to broad rating pressure.
The report traced the sector's long history of investing beyond public bonds and said that the move into alternatives had accelerated in recent years. Direct loans, mortgages, private equity, hedge funds and structured products played a larger role in life company portfolios as firms looked for yield and duration in a still-uncertain rate environment.
Morningstar argued that illiquid assets could be appropriate for life insurers when they were aligned with liability profiles and supported by disciplined asset-liability management and liquidity stress testing. However, in some cases, rising allocations had weakened its assessment of the "Risk Profile" and "Liquidity" elements for individual issuers.
The aggregate securities portfolio of US life insurers grew by about 5% in 2024, but growth in less liquid assets outstripped that headline number.
Asset‑backed securities (ABS), collateralized loan obligations (CLOs) and other structured products increased by 12% year over year. Schedule BA assets, which were largely private equity and hedge fund holdings, rose 9%, while mortgage loans grew 7%. By contrast, more liquid holdings such as investment‑grade corporate bonds, cash and short‑term investments expanded by only 3% to 4%.
According to Morningstar, the data “reinforced the continuing shift toward less liquid investments that trade in thinner secondary markets” as insurers accepted reduced liquidity in exchange for higher yields. The report noted this approach was generally better suited to life companies with fewer liquid liabilities, predictable cash flows, strong asset‑liability management and robust liquidity contingency plans.
Despite the shift, portfolios remained diversified. At year‑end 2024, investment‑grade corporate bonds still accounted for about 38% of invested assets. Less liquid assets made up roughly 36% of total investments, including 14% in mortgage loans, 10% in ABS and other structured securities, 6% in Schedule BA assets, 4% in private‑label CMBS and RMBS and 2% in non‑investment‑grade corporate bonds. The share of less liquid assets had risen from 32% in 2020 to 36% in 2024.
Meanwhile, Morningstar emphasized that liquidity needed to be assessed across both assets and liabilities. It highlighted significant variation in asset mixes between companies, with private‑equity‑backed annuity writers often holding especially high concentrations of ABS and CLOs, sometimes representing most of their invested assets.
That concentration left those firms with generally less liquid investment portfolios than typical life insurers. However, their liability structures provided a partial offset. Fixed‑rate and fixed‑indexed annuities usually included surrender charge periods of three to 10 years, which discouraged early terminations and improved cash‑flow predictability. This made it less risky to back such liabilities with illiquid assets, the report said.
Even so, a sudden increase in policy surrenders remained the key liquidity risk. The degree of protection from surrender penalties depended on their level and expiry dates, and tended to diminish in stressed conditions. Citing external studies, Morningstar noted that surrender activity tended to rise once penalty periods expired and when interest rates increased, as policyholders sought products with higher credited rates.
The agency said it viewed positively those insurers that ran sophisticated liquidity stress tests linking surrender behavior to both interest‑rate movements and the timing of penalty expirations. Its broader analysis also considered collateral needs and margin calls from derivatives and hedging programs, as well as the quality of internal stress‑testing frameworks.
Supervisors were responding to the growth in alternative assets. In Europe, Solvency II reforms had put more emphasis on liquidity management, including stressed haircuts and realistic sale assumptions for hard‑to‑trade exposures.
In the US, the National Association of Insurance Commissioners (NAIC) was relying on tools such as Own Risk and Solvency Assessment and liquidity stress testing for large life insurers, but it was also adjusting capital rules. The NAIC was revising capital charges for CLOs, with plans to review all structured securities, and expected the CLO work to be completed in 2026, the report said.
From Jan. 1, 2026, it also had authority to challenge public and private credit ratings that differed from its own analysis by more than three notches for capital purposes and to substitute its own view.
Looking ahead, Morningstar expects US life insurers, particularly fixed annuity writers, to keep shifting toward alternative assets. Higher yields and better duration matching, it said, could help insurers remain competitive on product pricing, even as regulators and rating agencies stepped up scrutiny of illiquidity and liquidity risk.
