Short sellers’ bets on life insurance stocks soar as private credit concerns grow.

Short sellers’ bets against U.S. life insurance stocks more than doubled in ⁠the ⁠past year to over $5 billion, a Reuters analysis of ORTEX ⁠data shows, a move that analysts say in part reflects concerns about exposure to the opaque private credit sector.

Jitters about private credit - lending ​to companies by non-banks, such as private equity funds and asset managers - have shaped markets in recent months, after portfolio managers were found to hold debt from bankrupt auto firms and a UK mortgage provider accused of ‌fraud.

“Concerns are not about a single blow‑up, but about ‌potential structural vulnerabilities with the (private credit) asset class having much less regulation and oversight than the traditional banking system,” said Mediolanum International Funds head of fixed income Daniel Loughney.

“Institutional exposure to the asset class has ⁠grown significantly over the ⁠past decade. Overall we see a problem brewing that will affect the life assurance markets, annuity markets and the ​asset management industry,” said Loughney.

Private credit holdings among U.S. life and annuity insurers more than doubled over the last 10 years, during a period of historically low official interest rates, according to ratings company and insurance industry specialist AM Best.

U.S. life insurers have roughly a 35% exposure of their balance sheet tied up in private lending, the International Monetary Fund has reported, citing Moody’s data.

This type of alternative credit offers higher yields and long-term steady returns, ​fitting the mandate of insurance companies which need to match investment horizons with the prospect of payouts over years or decades.

Hedge funds have sensed an opportunity.

Traders added almost $3 billion to ⁠the ⁠value of short bets, or bets that ⁠a stock price will decline, on 10 ​top U.S. life insurance companies in the past year, bringing the total to around $5.3 billion, Reuters’ calculations based on data provided by financial analytics firm ORTEX show.

These firms ​saw a more than 130% increase in the proportion ⁠of their stock that traders borrowed in order to take out short positions on these companies, the data showed.

Concerns about private credit are also being reflected by investors pulling money from retail funds that package up private loans to middle-market companies and trade them on public exchanges. Questions over the value of the underlying loans, many of which have been made to AI infrastructure companies, have arisen from whipsawing tech markets

The S&P 500 U.S. insurance index, which includes life insurers, has fallen almost 5% so far this year versus a 4.7% rise for the broader S&P index.

Barclays analysts estimate that the collective earnings per ⁠share of 15 U.S. life insurance companies will drop by almost 7% over the course of this year, saying that markets appeared to ⁠be pricing in a “fairly severe” outcome, including either a recessionary backdrop or losses within private credit portfolios. However, they added that these concerns were overdone.

When looking at short bets against global insurance firms, the value grew by more than 60% in the 12 months to April 15, to over $31 billion, according to calculations by Reuters using S&P Global and LSEG data.