Are US Life Insurers the New Shadow Banks?

We show that large US life insurers increased lending to below investment grade firms starting in 2009 as banks refocused on commercial banking, against a backdrop of unconventional monetary policies and tighter bank regulations. These insurers have developed new businesses to profit from liquidity transformation by exploiting tax and capital arbitrage through complex on- and off-balance sheet arrangements. Using the COVID-19 pandemic as a natural experiment, we show that these insurers have become exponentially more vulnerable to an aggregate corporate sector shock. In addition, they benefited from the Federal Reserve's response to the pandemic.