From the credit card to the annuity

A household stops repaying its auto loan somewhere in the Midwest. The scene is ordinary, and we showed elsewhere how much it repeats, subprime auto delinquency being at its highest since the 1990s. The question left open is not whether the American consumer cracks, it is who takes the loss when they do. The answer is counterintuitive: almost never the bank that lent. The risk has been sliced, packaged, resold, and it keeps travelling, tranche by tranche, all the way to an insurer’s balance sheet and a retiree’s annuity. That journey is the most important and least told story in consumer credit.

The starting point is a widespread misunderstanding. One imagines the subprime lender bears the risk of its loans, like a classic deposit bank. It does not. Specialised lenders do not keep these loans on their books: they securitise them into ABS and sell the tranches to institutional investors around the world, bond funds and pension funds first. The originator collects a fee and offloads the risk almost at once. Understanding where that risk goes means following the chain, link by link.

The securitisation waterfall

The first link is mechanical. The receivables, auto loans, card balances or instalment payments, are pooled in a trust bankruptcy-remote from the originator, which issues securities backed by those assets, the ABS. These securities are cut into ranked tranches, exactly as in the CLOs our guide describes. The senior tranche, rated AAA, is paid first and absorbs losses last; the equity tranche, at the very bottom, takes the first defaults in exchange for the highest yield. Between them, mezzanine tranches. The rule is simple: when a borrower defaults, the loss climbs from the bottom up, and the equity tranche is designed to be wiped out first to protect senior investors.

That dispersion has one reassuring consequence and one misleading one, and both must be held at once. The reassuring one: the AAA rests on a cushion of subordination, and it would take massive losses to reach it. The misleading one: the risk did not vanish, it concentrated in the lower tranches, and those tranches found an eager buyer.

The new buyer: private credit

That buyer is private credit, and its appetite has changed the nature of the market. The big alternative asset managers, Apollo in the lead with more than $1 trillion in assets at the first quarter of 2026 and the leading private credit firms together weighing more than $3.4 trillion, have rushed into asset-based finance, the compartment that securitises the receivables of daily life. They no longer just buy the tranches, they settle across the whole chain. KKR signed a €6 billion forward-flow deal with PayPal to fund its instalment lending directly, and launched the first BNPL securitisation in Europe; the Pagaya platform issued about $300 million of securities backed by Klarna loans, arranged with Apollo’s help; Affirm has closed more than a dozen ABS deals on its point-of-sale loans.

The shift is decisive. Through these forward-flow deals, private credit no longer just buys the risk once created, it funds the loan’s origination. In other words, the funds’ reach for yield directly feeds the subprime credit expansion we described from the borrower’s side, those raised card limits and that proliferating instalment lending. The one who will bear the loss is also the one who supplied the ammunition. This circularity, private credit lending in order to securitise what it will hold, is the newest and least discussed feature of the cycle.

The last link: the annuity

What remains is where the journey ends, and the answer closes the loop in an unsettling way. Private credit does not hold these assets on its own account: it lodges much of them on the balance sheets of the insurers it controls. Apollo recycles the premiums of its Athene affiliate into private credit and asset-based finance; the whole sector follows, with US life insurers’ private credit holdings reaching $849 billion in 2024, more than double their 2014 level. These insurers seek long-dated yield to back their annuity commitments, and a growing share runs through offshore reinsurance structures, often Bermudian, whose opacity we described in our investigation of life insurers and private credit in Bermuda.

The journey is therefore complete. Starting from the dashboard of a used car financed at a high rate, the risk has crossed a securitisation trust, a mezzanine tranche, a private credit fund, a reinsurance captive, to settle at last beneath the annuity of a retiree who never went near a subprime loan. From the credit card to the annuity, the risk changed hands five times without ever leaving the system, and at each step it became a little harder to see.

The other reading: dispersion is a strength

Before crying the next 2008, one must grant this construction what is solid in it, because the subprime analogy is misleading. Several counterpoints hold.

First, dispersion is precisely what was missing in 2008. The mortgage risk of the time was concentrated, correlated and lodged in highly leveraged banks that had to sell in a panic. Here, consumer credit is spread in small tranches across hundreds of investors, and consumer ABS is an old, tested asset class that weathered the crisis better than mortgage CDOs. Second, the matching makes sense: an insurer that must pay annuities over thirty years has good reason to hold long, illiquid assets it intends to keep to maturity, never forced to sell. A holder who does not sell does not spread panic. Third, subordination works: as long as losses stay within the thickness of the lower tranches, the pension funds’ AAA does not move, and that is exactly what it is for.

But dispersion hides a re-concentration

The counter-reading has its limits, though, and they are serious. The first blind spot is that apparent dispersion masks a real re-concentration. The risk leaves thousands of banks to gather in a handful of mega-managers that now originate, structure, hold and insure the same asset: diversification across investors comes with concentration across firms. The second is valuation: lodged in private credit funds, these assets are marked to model, often near par, not to market, which delays loss recognition, a problem we dug into in our analysis of one asset, two prices. The third is funding: the forward-flow deals and warehouse lines that feed origination can be cut in stress, abruptly drying up credit where it is most fragile. The fourth, the most disturbing, is one of identity: the ultimate risk-bearer is an annuitant, through an offshore structure they do not understand and that no state supervisor fully oversees.

The conclusion is therefore neither alarm nor relief, but a shift of gaze. The American consumer’s risk did not grow by changing address, but it became more opaque, more concentrated among its managers and slower to reveal itself. The real question, once the borrower’s fragility is established, is not whether the banking system will shake, it barely holds this risk anymore, but what happens the day an annuitant discovers that their retirement rested, through five intermediaries, on the punctuality of a stranger repaying their car. The risk left the light of bank balance sheets for the shadow of private credit. It did not vanish. It is just waiting somewhere else, where no one is looking.

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Sources

• Wolf Street, “Auto Loan Balances, Debt-to-Income Ratio, and Delinquencies of Subprime & Prime Auto Loans in Q1 2026” (specialised lenders securitise subprime auto into ABS sold to investors; prime delinquency 1.9%, subprime 60-day at 6.90%)
• GlobalCapital, “KKR’s debut lays foundation for BNPL ABS asset class in Europe” (€6bn forward flow with PayPal, first BNPL securitisation in Europe)
• HedgeCo, “Apollo Tops $1 Trillion in AUM and Moves Toward Daily Private Credit Pricing”, May 2026 (Apollo above $1tn, Athene, asset-based finance)
• American Banker, “Is private credit a $2 trillion-dollar insurance timebomb?” (life insurers’ private credit at $849bn in 2024, more than double 2014; offshore reinsurance)