Board of Governors of the Federal Reserve System

Figure 1. Life insurers’ position in the intermediation chain of credit to risky firms

Figure 1 is a stylized map showing life insurers’ position in the intermediation chain of public and private credit to risky firms. Life insurers occupy the middle of the map. An investment relationship is depicted using arrows from the asset or firm to the investor. The left side of the map shows insurers’ assets backed by risky corporate loans. The arrows and items on the left side of the map show that collateralized loan obligation (CLO) managers purchase bank loans from risky firms, securitizing these leveraged loans into broadly syndicated loan (BSL) CLOs. Life insurers invest directly in risky firms through purchasing these leveraged loans and are exposed indirectly via holding tranches of the BSL CLOs. Risky firms also receive funding from nonbank financial institutions, such as business development companies (BDCs) and their joint venture loan funds (JVLFs). BDCs and JVLFs make direct loans to risky firms, primarily small and medium-sized companies, and these loans are purchased and securitized by middle market (MM) CLO managers. Life insurers purchase the debt and equity of BDCs and MM CLOs. The right side of the map shows the sources of insurer funding. Traditional insurer funding comes from policyholders through fixed annuities and nontraditional insurer funding comes from institutional investors through liabilities such as funding agreement backed securities (FABS), advances from the Federal Home Loan Banks (FHLBs), securities lending programs, and repo programs.

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Figure 2. Loans held by CLOs issued by asset managers affiliated with life insurers

Figure 2 contains two charts. Chart A, U.S. and European BSL Life Insurer CLO Loans Outstanding, is a stacked bar chart. The height of each bar represents the total dollar amount of the loans backing BSL CLOs originated by life insurer-affiliated asset managers, with different colors representing different life insurers. On top of the stacked bar chart, there is a line chart that depicts the insurer-affiliated percent of all BSL CLO loans outstanding. The x-axis is depicted in years, and it ranges from 2011-2023. There are two y-axes. The far-left y-axis is a percentage, and it ranges from 0% to 50%. The far-right y-axis is in billions of dollars, and it ranges from $0 to $400 billion. The stacked bar chart shows an increase in insurer-affiliated BSL CLO loans outstanding from 2013 through 2023. The insurer share of BSL CLO loans outstanding ranges from 18% to 36%. It hovers around 19% from 2011 through 2016, where it increases to 27% in 2017 and then remains mostly flat until increasing to 32% in 2021. It hits its peak in 2022. Chart B, U.S. and European Middle Market Life Insurer CLO Loans Outstanding, is a stacked bar chart. The height of each bar represents the total dollar amount of the loans backing middle market (MM) CLOs originated by life insurer-affiliated asset managers, with different colors representing different life insurers. On top of the stacked bar chart, there is a line chart that depicts the insurer-affiliated percent of all MM CLO loans outstanding. The x-axis is depicted in years, and it ranges from 2011-2023. There are two y-axes. The far-left y-axis is a percentage, and it ranges from 0% to 50%. The far-right y-axis is in billions of dollars, and it ranges from $0 to $40 billion. The stacked bar chart shows fewer than $2.5 billion in loans from 2011 through 2016, after which it increases for every remaining year shown, reaching its peak in 2023 at $35 billion. The insurer share of MM CLO loans outstanding mirrors the shape of the stacked bar chart and ranges from 6% to its peak in 2023 of 42%.

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Figure 3. Business development company assets under management

Figure 3 is a stacked bar chart showing the dollar amount of investment holdings of 138 business development companies (BDCs) flagged by the BDC’s affiliated life insurer, if applicable. On top of the stacked bar chart, there is a line chart that depicts the insurer-affiliated share of the BDC investments. The x-axis is depicted in years, and it ranges from 2013 to 2023. There are two y-axes. The far-left y-axis is a percentage, and it ranges from 0% to 100%. The far-right y-axis is in billions of dollars, and it ranges from $0 to $300 billion. The stacked bar chart shows both an increase in overall BDC investments over the period shown and an increase in the amount and percent of insurer-affiliated BDC investments. The stacked bar ranges from $2 billion to $118 billion, reaching its peak in 2023. In 2021, driven primarily by large increases in the investments of BDCs affiliated with three insurers, the insurer-affiliated share of BDC investments jumps to 50% from 7% in 2020.

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Figure 4. Life insurers’ investments in risky corporate debt

Figure 4 contains two charts. Both charts are stacked bar charts showing life insurers’ investments in risky corporate debt. On top of each stacked bar chart is a line chart showing the share of the total assets of the insurers whose investments are included in the respective charts. The categories included in the stacked bar chart are high-yield corporate bonds, corporate loans, BSL CLOs, MM CLOs, and BDCs/JVLFs. On both charts, the x-axis is depicted in years, ranging from 2006 to 2023. Each chart has two y-axes. The far-left y-axes show a percentage ranging from 0% to 10%. The far-right y-axes are in billions of dollars, ranging $0 to $500 billion. Chart A includes all U.S. life insurers, while Chart B is a subset of Chart A and includes only the US life insurers affiliated with asset managers that manager BDCs, CLOs, and JVLFs. Both stacked bar charts show a steady increase in investments throughout the period shown. The percent share of (select) life insurer assets is slightly higher in Chart A for all periods. In Chart B, investments in the BDCs/JVLFs category are negligible.

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