Structured credit piques insurers’ interest
Insurers are showing growing interest in private structured credit and asset-based lending activity, as higher rates have weighed on direct lending origination.
Historically, direct lending was the predominant private credit sub-sector favoured by insurers.
However Katie Cowan, head of insurance client solutions at First Eagle Investments, said this is shifting.
“More recently, we have observed growing interest in other areas of the private credit universe by our insurance partners,” she said. “For example, private structured credit and asset-based lending activity.
Read more: Insurers remain bullish on private credit
“We believe these sectors serve as strong complements to insurers’ existing direct lending exposure as they work to broaden their allocation to alternative credit assets.”
Competition has hurt lofty returns in direct lending, prompting a search for newer growth opportunities, such as the asset-based finance (ABF) market and investment-grade private credit as insurance companies search for higher yields, a recent report by ratings agency Moody’s found.
Around 62 per cent of insurers plan to increase their private markets allocations in 2025, according to a survey of insurance CIOs conducted by Goldman Sachs, with 58 per cent saying they plan to increase their allocations to private credit.
Read more: Largest managers and funds increasingly dominate private credit
Insurers often pursue different private credit sub-sectors depending on their investment objectives – whether to enhance risk-adjusted returns, achieve steady cash flows, improve capital efficiency, or leverage potential tax advantages.
For example, Cowan says that real assets private credit investments, such as owning and leasing railcars – which are integral to domestic supply chains and less vulnerable to technological disintermediation – can potentially generate long-term stable income streams.
The pivot towards private markets among insurers is part of a longer-term trend going back to the years following the financial crisis, when persistently low interest rates prompted many insurers to reduce traditional credit exposure in favour of alternative asset classes.
This includes private credit, which has historically offered more attractive yields in exchange for perceived complexity and illiquidity.
“Even as yields on traditional credit instruments have rebounded, insurers continue to seek enhanced marginal returns, structural advantages, and potential diversification benefits available through private credit strategies, including structured credit and other forms of private lending,” says Cowan.
Neuberger Berman said private credit markets have the potential to offer attractive structural advantages for insurance companies.
Private credit should continue to play an important role in insurance portfolios, giving insurers “more tools for tailoring their portfolios to meet their specific risk/return requirements”, the asset manager said in a recent report.
Read more: Analyst forecasts 13.6pc gross leveraged returns from private credit
Moody’s forecasted insurance companies will deepen ties with private credit. Synergies between insurance companies and alternative managers will grow, but, the credit rating agency warned, it “will be essential to monitor risks, especially credit and asset-liability mismatch risks.”
Moody’s expects the size and scope of the global private credit markets to continue to grow rapidly in 2025, spurred by lower interest rates, declining default risk and solid economic strength, led by the US and Europe.
Global private credit assets under management will jump to $3tn (£2.27tn) by 2028, the credit rating agency forecasted, reflecting greater momentum than in the past two years.
