The National Association of Insurance Commissioners’ (NAIC) new principles-based bond definition has shone a brighter spotlight on shifting U.S. life/annuity insurer investment strategies amid increased private placements and allocations to asset-backed securities, according to a new AM Best report.

The NAIC’s revision of its definition of a bond to focus more on the substance of the security and less on its legal structure took effect in 2025, and with the change, some bonds that were previously held on Schedule D moved to Schedule BA, resulting in a higher risk-based capital charge. The Best’s Special Report, “Bond Shifts Highlight Evolving Investment Strategies Among US Life/Annuity Insurers,” notes that following the Great Financial Crisis, a wide array of asset strategies emerged to provide insurers with yield enhancement; however, they also carried risks surrounding liquidity, valuation and transparency.

According to the report, corporate bonds remain the anchor of bond portfolios, but allocations to asset-backed securities continue to rise, which in some cases can come with increased credit and default risks. In addition, new forms of private credit in the market could lead to more valuation uncertainty, and covenants, which protect the lender by monitoring performance through financial metrics related to interest coverage, leverage, and liquidity, have become less common.

“As insurance companies increasingly outsource investment management functions, selecting high-quality fund managers with stricter underwriting and more-extensive monitoring capabilities remains crucial to effectively manage troubled loans,” said Kaitlin Piasecki, industry research analyst, AM Best. “It’s important to note that private placements as a growing asset class have yet to be tested by a severe credit event.”

Other report takeaways include:

• The NAIC is presently focused on the risk-based capital treatment of collateralized loan obligations (CLOs), the majority of which are backed by broadly syndicated below investment grade senior secured loans. Should new risk-based capital factors become effective by year-end 2026 filings, companies with large concentrations in CLOs could face higher capital charges for CLO debt tranches that fall below NAIC-1 quality.
• An elevated ratio of payment-in-kind interest, which allows borrowers to fulfill payment with additional debt rather than cash, to capital and surplus, could indicate greater exposure to investment risk, especially in the event of a market downturn.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=366649.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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