The Hidden Risk in Shadow Banking: How Insurance Companies Face Unforeseen Liquidity Threats

Delaware Life Insurance Company’s 2025 balance sheet has undergone a dramatic transformation following a correction in its annual filing. The insurer revealed that approximately $17 billion in investments—roughly 39% of its invested assets—are classified as related-party holdings, a massive jump from the previously reported $1.4 billion, or 3%.

Clear Spring Life and Annuity Company also issued a correction of approximately $4.6 billion. Combined, these revisions exceed $20 billion across entities connected to financier Mark Walter.

While transactions with related entities are permitted under state insurance regulations, and these corrected labels do not inherently indicate poor loan quality, they highlight a growing transparency issue. The complex model of utilizing private assets, affiliated managers, and patient insurance capital can become opaque, even for regulatory professionals tasked with auditing statutory accounts.

The matter has now drawn federal scrutiny. Delaware Life’s second-quarter filing indicates that both the company and Clear Spring received grand jury subpoenas from the U.S. Attorney’s Office for the Southern District of New York in February.

Concurrently, the SEC has launched an inquiry into whether certain private-credit investments introduced by an affiliate should have been labeled as related-party transactions. Delaware Life has stated it is cooperating with authorities and identified the disclosure errors through an internal review. As of now, federal authorities have not filed any criminal charges against Walter or the insurers.

This situation reflects a broader systemic trend. The surge in American private credit has increasingly relied on life insurance companies as a primary funding source. While these insurers have long-term liabilities that theoretically justify holding illiquid, non-traded loans, they remain vulnerable to sudden liquidity demands from policyholders, derivatives counterparties, and wholesale funders.

How Life Insurers Became the Engine of Private Credit

Life insurers collect premiums to fund benefits that may not be paid out for decades, making long-dated private loans an attractive asset class. Private credit involves loans negotiated outside of public markets, often featuring custom covenants and higher yields to compensate for limited liquidity and valuation challenges. The National Association of Insurance Commissioners (NAIC) views this duration as a suitable match for insurance liabilities, though the illiquidity presents oversight hurdles.

For asset managers, partnering with or acquiring an insurer provides a consistent stream of premium income to fund private loans, asset-backed securities, and structured products. This creates a cycle where policyholders receive annuities, insurers collect yield, and managers collect fees.

The scale of this relationship is now comparable to traditional banking. NAIC data from year-end 2024 shows that 137 U.S. insurers are owned by private equity firms—up from 90 in 2018—controlling $704.3 billion in assets, or 7.8% of the total $9 trillion held by U.S. insurers. Life insurers represent 96% of this private-equity-owned segment, a figure that grew to 139 companies by June 2025.

Private-equity-owned insurers hold roughly $133 billion in structured and asset-backed securities, representing 31% of their bond portfolios, compared to just 13% for the broader industry. Federal Reserve research further indicates that life-insurer-affiliated managers control approximately 35% of broadly syndicated loans and 40% of middle-market loans routed through collateralized loan obligations (CLOs), overseeing 72% of industry general-account assets.

The Delaware Life correction places significant weight on affiliation disclosures. An exposure of $17 billion necessitates much deeper scrutiny regarding underwriting standards, pricing, fee structures, concentration risks, and independent valuations than the original $1.4 billion figure suggested.

Unlike public bonds that trade daily, bespoke private loans may see no transactions for months. Consequently, credit ratings and manager-provided data carry disproportionate influence over reported solvency and capital requirements.

Reports indicate that Egan-Jones Ratings Company was the sole known rating provider for approximately 16% of Delaware Life’s $32 billion bond portfolio and at least half of Clear Spring’s $6.3 billion bond book. Related companies have paid the firm roughly $8 million since 2024.

This represents a high level of concentration in judgments that directly impact regulatory capital treatment, independent of actual loan quality.

The NAIC found that 96% of bonds held by private-equity-owned insurers carry NAIC 1 or 2 designations—the highest categories—aligning with industry norms. Most holdings are classified as investment grade, which contributes to the sector’s seemingly stable solvency ratios.

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An investment-grade label does not guarantee immediate liquidity. A senior private loan might be scheduled to repay over seven years but could face a massive price discount if sold quickly. For private-equity-owned insurers, “Schedule BA” assets (a category for harder-to-classify investments) are affiliated at a rate of 67%, compared to 48% across the wider industry, while collateral loans have reached $19.2 billion.

The International Monetary Fund (IMF) estimates that private credit accounts for about one-third of North American insurers’ investments. Because expected repayments and immediate market values can diverge sharply, an insurer may remain solvent on a “hold-to-maturity” basis while facing a severe cash shortage during a market dislocation.

The Risk of a Run via Surrenders and Collateral Calls

While insurance liabilities typically move slowly, allowing more time than a traditional bank, certain triggers can rapidly compress liquidity. Policy surrenders, institutional maturities, and derivative collateral demands can create sudden, intense pressure when markets turn volatile.

An annuity holder can often surrender a policy for cash, typically subject to a declining surrender fee. According to BIS research, these penalties often start around 10% and decrease annually. Global surrender values can represent up to 30% of life-sector assets, with roughly half potentially redeemable within a single week.

When market interest rates rise above the returns offered by older annuities, customers may surrender policies to reinvest elsewhere. This forces insurers to sell bonds or private loans that have lost value due to rising rates. BIS simulations suggest that a sustained annual increase of just 25 basis points could necessitate annual asset sales of nearly 2%—a manageable task in calm periods, but devastating if many firms face such demands simultaneously.

Derivatives can accelerate this process through mandatory collateral schedules. An insurer using interest-rate swaps may be required to post fresh collateral during sharp rate movements, necessitating immediate cash even if their long-term hedging strategy remains sound.

At year-end 2024, 28 private-equity-owned insurers held nearly $26 billion in Federal Home Loan Bank (FHLB) advances, representing 16% of all insurer FHLB borrowing. These maturities and collateral requirements operate on schedules that are independent of actuarial projections.

The Federal Reserve’s May 2026 financial-stability report noted that life insurers’ nontraditional liabilities reached $531 billion in late 2025, a 15% real-term increase over one year. While small relative to total assets, illiquid investments represented roughly 37% of life-insurer assets in 2024, meaning a significant portion of their holdings cannot easily satisfy urgent cash claims.

A recent warning came from Italy’s Eurovita, whose solvency ratio plummeted from 230% to near 130% by the end of 2022 due to the combined impact of bond losses and policy surrenders. This led to special administration and a temporary freeze on redemptions in early 2023, demonstrating how liabilities can spike when customers seek better rates elsewhere.

In response, the NAIC now requires more granular detail regarding private ratings, including Private Rating Letter Rationale Reports. Delaware Life also disclosed an agreement for TWG Global to exchange up to $6.5 billion of affiliate-dependent investments for an equivalent amount of non-affiliated assets, pending regulatory approval.

The companies maintain that their capital and liquidity positions remain strong. As of June 30, Delaware Life reported $70.5 billion in admitted assets and $4 billion in capital and surplus, with major financial-strength ratings at A-minus, though some carry negative outlooks.

The marriage of private credit and insurance is economically logical, as illiquidity can match long-term policy commitments. However, danger arises when related-party connections obscure pricing, when ratings replace market discovery, and when simultaneous demands for cash—through surrenders, collateral notices, and maturing advances—create a run on the insurer.

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