Moody's says US life insurers use rated note feeders to reach private credit

US life insurers are increasingly using rated note feeders to gain exposure to private credit, Moody's Ratings says.

The rating agency estimates that 35% of US life insurance investments go toward private credit, according to Alternative Credit Investor's report on the findings. Moody's describes the feeders as a capital-efficient route into direct lending, infrastructure, asset-based finance and commercial real estate, alongside the potential for diversification and enhanced yields.

Rated note feeders are special purpose vehicles that issue one or more classes of tranched debt, typically senior and junior notes, alongside an unrated equity tranche. They rank among the fastest-growing fund finance vehicles, per Moody's.

Moody's says the structures carry credit and operational risks that limited transparency amplifies. Insurers investing in the feeders generally have detailed transaction information, but outside stakeholders often see little of the structure, the underlying portfolio or its performance, particularly where ratings are assigned on a private letter basis, the rating agency says.

The National Association of Insurance Commissioners has recently expanded its scrutiny of US insurance companies' private credit investments, and its regulatory review of rated note feeders is ongoing, the report says.

Credit performance of the structures ultimately depends on the underlying credit portfolio and the reliability of valuations, Moody's says. That points diligence toward loan selection and valuation marks rather than the note's rating.