Private credit's growth through an insurance lens

Key takeaways

• As private credit continues to evolve into a sizable and scalable asset class, its addressable markets of investors and borrowers have also expanded. Among the most notable shifts, in our view, has been the increasing participation from the insurance investor base.
• In this Q&A, we address several of the most frequently asked questions related to the insurance industry’s participation in private credit. We also explore important nuances between the Life and P&C industries’ approach to private investment exposures, as well as regional differences.
• We see four primary drivers behind insurers’ growing allocations to private credit: (1) matching long-term assets with long-term liabilities; (2) seeking capital-efficient yield; (3) enhancing portfolio diversification; and (4) responding to changing market and client dynamics. A combination of these elements has encouraged insurance companies – especially life insurance companies – to shift their allocations toward private credit, in our view.
• We also seek to understand the ‘optimal’ level of illiquidity to hold in an insurer investment portfolio. This is because, beyond managing investments to meet anticipated policyholder demands, insurers must consider the additional liquidity needs associated with catastrophes and other ‘tail’ events. To answer this question, we evaluate the financial resilience of the life and P&C insurance sectors over time, using a range of financial metrics to illustrate how much cushion has historically been embedded in insurers’ investment exposures.
• Our takeaway is that, in aggregate, there is scope for insurers to allocate more dynamically between public and private credit, including increasing exposure to illiquid assets. That said, increasing exposure to private assets may not be well-suited for every insurer.
• Finally, we provide color on the trend of partnerships between asset managers and insurers, including the benefits provided to each party and the tactical execution behind such partnerships.