US life insurers shifted $800 billion offshore from 2019 to 2024, Moody's says

A Moody's report indicates that U.S. life insurers shifted nearly $800 billion in reserves to offshore affiliates between 2019 and 2024, driven by the growth of private credit and the pursuit of higher returns amid low interest rates. This trend involves partnerships and M&A deals with private equity firms, facilitating capital deployment for growth, competitive pricing in annuity products, and shareholder-friendly activities. The shift raises concerns about transparency and liquidity risks associated with the increasing allocation to private credit assets, which now constitutes an estimated one-third of the industry's $6 trillion in cash and invested assets.

Analysis

A recent Moody's Ratings report highlights a significant transformation within the U.S. life insurance sector, with nearly $800 billion in reserves transferred to offshore affiliates between 2019 and 2024. This strategic shift, largely driven by the pursuit of higher returns in a historically low-interest-rate environment (2015-early 2020) and the burgeoning growth of private credit, has seen insurers increasingly partner with or merge with private equity firms, exemplified by approximately $75 billion in M&A deals such as Allstate's $2.8 billion sale of its life and annuity businesses to Blackstone-managed entities and Brookfield Reinsurance's $5.1 billion acquisition of American National. The primary motivations for these offshore reallocations and private credit investments include freeing up capital to support growth, offering more competitive product pricing, particularly for annuities, and facilitating shareholder-friendly actions like share repurchases. Consequently, an estimated one-third of the U.S. life insurance industry's approximately $6 trillion in cash and invested assets as of year-end 2024 is now allocated to private credit, with fund finance expected to see further growth. However, Moody's underscores critical risks associated with this evolving model, notably the lack of transparency in valuing complex private credit assets and their inherent illiquidity, which could pose significant challenges during stressed market conditions or forced liquidations.

Key Decisions for Investors

• Investors should scrutinize life insurers' increased exposure to private credit and offshore reserve transfers, paying close attention to the transparency and valuation methodologies for these less liquid assets.
• Assess the potential impact of heightened regulatory focus on these strategies, which could affect capital adequacy and profitability for insurers heavily involved in offshore reinsurance and private credit.
• Differentiate between insurers based on their risk management frameworks for private credit, particularly their ability to navigate illiquidity and valuation complexities in evolving market conditions, given the cautious outlook on these exposures.