US insurers with larger exposure to complex, illiquid, subordinated, or aggressively underwritten assets could face negative rating pressure under the NAIC’s new private letter rating challenge process, according to Fitch Ratings.
The National Association of Insurance Commissioners’ Invested Assets Task Force implemented the process at the start of 2026.
The mechanism increases scrutiny of opaque private assets by stress testing ratings that diverge from regulator-determined assessments.
If the task force challenges and overrides private letter ratings, insurers could face higher required capital. That would reduce capital headroom over the next 12 to 18 months for carriers with heavier exposure.
Fitch expects limited credit effects for well-capitalised insurers with modest private letter rating exposure and strong governance. The risk sits elsewhere, with companies using thinner capital buffers, more valuation judgement, and higher spread income from complex assets.
US life insurers have increased allocations to private credit, and private letter ratings have grown with that shift. At year-end 2025, PLRs rose 16% year on year, contributing to a 20% compound annual growth rate over the past five years.
That growth has been mostly neutral for ratings so far. Insurers have used the illiquidity of some liabilities to hold private assets, supported by asset-liability management and largely investment-grade private investments. Good structure helps. It does not remove scrutiny.
PLRs increased to $483 bn at year-end 2025 from $420 bn at year-end 2024. As a share of total bonds, they rose to 13% from 11%. As a share of total capital, they climbed to 85% from 72%.
The average credit quality of PLR exposures remained below that of insurers’ broader bond portfolios.
At year-end 2025, 58% of PLR exposures were classified as Level 3, the lowest fair value category, compared with 56% in 2024. Across overall bond portfolios, Level 3 assets represented 14% in 2025.
Level 3 assets carry more uncertainty around valuation, loss recognition, liquidity, and capital treatment under stress. According to Beinsure analysts, that is where the new challenge process matters most: opaque assets with limited market evidence become harder to defend when regulators ask for support.
Fitch said rating migration within PLRs will be an important signal of whether the NAIC process reduces credit risk. If the process produces more conservative classifications, capital charges are likely to rise first in opaque or subordinated positions.
Senior, well-documented private credit and securitised exposures with stronger data and structural protections should face less pressure.
Fitch’s illustrative risk-based capital stress test suggests industry-level capital sensitivity remains manageable. Still, it could become meaningful for insurers with lower capital headroom and larger PLR exposure.
On a pro forma basis, if a large majority of PLRs were downgraded by one notch, the industry’s aggregate RBC ratio at year-end 2025 would fall from 440% to 428%. A two-notch downgrade would take it to 413%, and a three-notch downgrade would lower it to 394%.
Fitch described those stress cases as extremely severe and remote, not its base case. The more likely outcome is selective pressure on insurers with above-average PLR concentrations, thinner buffers, and greater reliance on valuation judgement or spreads from complex assets.
Among the 13 insurers with the highest estimated required capital increase under Fitch’s hypothetical three-notch PLR downgrade stress, the average RBC ratio of 437% would fall to 418% under a one-notch downgrade. It would drop to 385% under a two-notch downgrade and 368% under a three-notch downgrade.
Those declines are steeper than the broader industry result because the group has higher nominal PLR exposure and different credit quality within those holdings.
Some effects are also amplified by affiliated offshore modified coinsurance and funds withheld reinsurance arrangements. In those structures, assets remain on US entity balance sheets while capital sits at offshore entities.
Fitch cited Athene and Global Atlantic as examples where the stress effect would look larger at the US entity level, but lower on an enterprise basis.
That distinction matters for ratings analysis, because legal-entity capital pressure and group-level strength do not always move together.
