Navigating the Nexus: The Intersection of Insurance and Private MarketsNavigatingtheNexus:TheIntersectionofInsuranceandPrivateMarkets

With this pool of long-term capital growing, insurers are increasingly allocating toward private assets, especially the credit space. Direct lending has accounted for much of private credit’s growth (Figure 2a), reflecting a decline in banks’ share of leveraged loans and a rapid expansion of private equity (Figure 2b). Growing investor interest in private markets has led to the proliferation of new private credit strategies as well, and insurers are providing access to the permanent capital that is financing these opportunities. One such growing opportunity is asset-backed finance (ABF). Insurers have been gradually increasing their market share in ABF, seeking the higher yields this asset strategy tends to generate (Figure 3).

The market transformation emerging from the nexus of insurance and private markets is still in the early innings. However, it is important to examine the potential implications as insurance (capital allocators) and private credit and ABF funds (capital seekers) begin to shift market dynamics.

Untangling the Implications

The shift from public to private assets will compel investors to take a holistic approach to portfolio construction, including comprehensive risk and liquidity management that accounts for both the opportunities and challenges emerging in this new paradigm. Careful attention must be paid to asset-liability management (ALM) principles, as these form the bedrock of sustainable insurance investment strategies and allow for the proper design, implementation, and monitoring of the strategic asset allocation. Private assets including ABF are typically shorter in duration and often floating, which means investing in them to access better yield should be complemented with allocations to more liquid and longer-duration assets to mitigate ALM risk. Moreover, robust credit monitoring capabilities help ensure early identification of potential issues, while building sector and geographic diversification into the portfolio mitigates concentration risk. Correlation analysis with existing portfolio exposures supports optimal construction as well.

Given the changes in strategic asset allocations among insurers and related shifts in market dynamics, regular liquidity stress testing and adequate liquidity buffers ensure that portfolios can remain resilient under possible adverse scenarios that develop, and detailed contingency funding planning provides protection against market disruptions. Effective ALM should consider the cash flow profile of the liabilities and ensure liquidity, interest rate, and other risks are properly mitigated through both portfolio construction and well-designed hedging strategies.

For insurers with sufficient liquidity tolerance, private ABF represents an attractive source of additional yield with spreads that represent significant alpha generation potential. Private ABF strategies also benefit from comprehensive structural protections and robust collateralization mechanisms that enhance credit quality, as well as underlying asset exposure that offers material diversification benefits compared with traditional debt portfolios.

Direct lending strategies, implemented through rated feeder and CLO structures, also represent a dynamic approach to capturing attractive yields while optimizing regulatory capital requirements. The rated feeder structure offers significant regulatory capital advantages for US- and Bermuda-domiciled insurers through optimized risk-based capital treatment.

Conclusion

The alpha opportunity set in private credit markets has expanded significantly. However, with this growth, markets have become increasingly complex. As insurance asset managers continue to develop their capabilities, the focus must remain on:

• Maintaining disciplined ALM practices
• Balancing key stakeholder interests
• Monitoring systemic risks from the ongoing market structure evolution
• Preparing for potential regulatory changes
• Ensuring robust risk management frameworks that address both traditional and emerging risks

The combination of asset-management expertise with sophisticated ALM capabilities positions insurance asset managers to optimize strategic asset allocation and identify tactical allocation opportunities to capture additional relative value. For investors, success in this evolving landscape will require having a partner who has the appropriate frameworks, tools and expertise to evaluate, implement and monitor these strategies, and who prioritizes risk management, liquidity considerations, and portfolio construction to ensure sustainable long-term results.

 

^{1. The Library of Economics and Liberty. Junk Bonds. https://www.econlib.org/library/Enc/JunkBonds.html. Accessed December 2024.}

^{2. Atlas Magazine. (2023, May 11). The American Insurance Markets, the World’s Number One Market. https://www.atlas-mag.net/en/article/the-american-insurance-market-the-world-s-number-one-market. Accessed December 2024.}

^{3. National Association of Insurance Commissioners. U.S. Life and A&H Insurance Industry Analysis Report. https://content.naic.org/sites/default/files/topics-industry-snapshot-analysis-reports-2023-annual-report-life.pdf. Accessed December 2024.}

^{4. Life Insurance Marketing and Research Association. (2024, September 18). Building on the Record Annuity Sales Momentum. https://www.limra.com/en/newsroom/industry-trends/2024/building-on-the-record-annuity-sales-momentum. Accessed December 2024.}