S&P Global: Insurers are managing private credit risks well

Insurers investing in private credit are managing the risks well, says S&P Global Ratings, who predicts that its share of their investment portfolios will increase further.

The ratings agency said that its ratings on insurers have not been affected by increased investments in private credit because the asset class still represents a relatively small portion of their total investments and the added risks are well managed.

It noted the benefits of investing in private credit, including higher yields and portfolio diversification.

“Our analysis suggests that, on average, insurers can pick up anywhere between 25 basis points and 200 basis points of yield on a private credit bond, compared with a similarly rated public bond, depending on the tenor, asset class, and market conditions,” S&P said in a report.

“Additionally, private credit can help insurance companies diversify their portfolios, reducing their reliance on public markets and spreading risk across various asset classes. This diversification is helpful for managing liabilities and making sure insurers can meet their obligations to policyholders.”

However, S&P also highlighted potential risks around illiquidity, as insurers need to maintain liquidity to meet policyholder claims, and the complexity of private credit investments.

Private credit has been growing in popularity among insurers, particularly life insurers who write long-dated liabilities with limited or no withdrawal options, so have significant capacity to take on liquidity risk.

A number of private credit firms have been partnering with life insurers to benefit from this trend.

Last month, it was announced that US life and health insurer CNO Financial Group is acquiring a minority stake in asset-backed credit specialist Victory Park Capital.

And last year, Golub Capital entered into a strategic partnership with Nassau Financial Group, providing Nassau’s insurance subsidiaries with access to its middle market direct lending strategies. It also took a minority stake in Nassau.

While S&P said private credit was not currently impacting its ratings on insurers, it said that it will continue to monitor its inclusion in their portfolios.

“While private credit has become a more meaningful part of insurers’ portfolios, especially for the life sector, it is still a relatively small part of the industry’s more than $8tn (£6tn) of invested assets,” the ratings agency said.

“However, as private markets continue to grow in general, it is likely that life insurers in particular will continue to flex their capabilities to take on liquidity risk and manage complex assets to reap the benefits of higher yields and greater diversity. We also expect that property/casualty (P/C) companies will diversify their investment portfolios with this asset class.

“It is incumbent on the industry to handle this growth responsibly, carefully managing the illiquidity and complexity these assets bring. We will continue to monitor and report on this trend while incorporating its risks into our ratings of both the life and P/C insurers involved.”