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German insurers are the most exposed in Europe to illiquid corporate bonds, a top watchdog said in one of the most detailed reports to date on the industry’s investments in private credit.

At €91.8 billion ($108 billion), more than 40% of German insurers’ bond holdings were in unlisted notes at the end of last year, the European Insurance and Occupational Pensions Authority said on Monday in Frankfurt.

Excluding index- or unit-linked investments, European insurers held about €1.2 trillion of corporate bonds, of which some 13% were illiquid or unlisted. Insurers could face “substantial losses” if they have to sell such assets below book value in a downturn, EIOPA said.

The exposure is notable because Germany was already a flash point in the global commercial real estate meltdown over the last two years, with private debt featuring prominently. Insurers there faced billions of euros in losses from the collapse of a series of developers including Rene Benko’s Signa conglomerate, and more pension funds have since flagged further hits from risky bets.

Illiquid or unlisted bonds — such as some debt issued by Signa — allow more closely-held or smaller firms to issue debt without the typical disclosure requirements or scrutiny associated with public markets. The more standardized bond format however makes it easier for institutional investors to purchase them.

European insurers’ private credit holdings surged almost 80% to €594 billion in June from the end of 2016 and now account for 5.8% of their total assets, EIOPA said. Occupational pension funds had €128.4 billion of exposure, or 4.4% of total assets, at the end of 2024, the watchdog said.

Germany, the Netherlands and France account for 72% of insurers’ private credit exposure, according to EIOPA. Insurers also focus on their domestic markets in the asset class, the watchdog said.

Such concentration is also reason for regulators and investors to “be vigilant” because it could amplify losses in a downturn, the watchdog said.

German insurers and occupational pension funds including Continentale Versicherungsverbund, Gothaer Group and Signal Iduna Group have been hit by souring real estate debt as Signa went bust after interest rates rose sharply from 2022. Meanwhile, Bayerische Versorgungskammer, Germany’s largest pension group under public law, warned last week of potential losses on US property investments.

More Diverse

In the case of illiquid and unlisted corporate bonds held in the European Union, 39% are on average from issuers in the country of the holder, compared with 22% for liquid bonds, EIOPA found.

Although insurers in Germany, Europe’s largest economy, hold the most exposure to illiquid corporate bonds, that exposure is distributed over a more diverse set of individual insurers than is the case elsewhere, EIOPA said.

Regulators globally have begun to pay more detailed attention to the risks emerging in the sector, including that from geographical concentration. The Bank for International Settlements suggested earlier this year that higher capital requirements could be needed for entities exposed strongly to risks including geographical concentration.

Insurers and pension funds have led the charge on private credit in Europe as they continue to chase the higher yields it offers compared to safer government bonds.

EIOPA said it is “unclear” whether European insurers will continue to increase allocations given elevated public bond yields and economic volatility. Such growth may be contained by rules on prudent investing and “conservative” policies at the firms, it said.