Insurance Companies Binged on Private Credit. Moody’s Is a Little Worried About It.

“Increase in private credit assets in insurance portfolios brings higher returns, but raises risks,” the ratings agency said.

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Insurance companies have been turning increasingly to alternative asset managers and have invested more in private credit, boosting investment returns. But it’s heightened risks, too, ratings and research agency Moody’s Investors Service warned in a report this week.

Most insurance company assets are invested in fixed income. But private credit has become more prominent because it offers higher incremental returns.

Almost two-thirds (62 percent) of insurance companies invest in private credit from a variety of places in their portfolios. Forty-two percent of private debt investments came from insurers’ traditional allocations to private equity, 20 percent came from multiple allocation buckets, and 16 percent was shifted into private credit from general alternatives allocations. Private credit also had its own dedicated allocation in 13 percent of insurance company portfolios, according to a Preqin report that included data from 900 insurers across the globe with an estimated $37.9 trillion in total assets.

Alternative asset managers have also happily met the demand for private credit because they get routine access to huge sums of insurance capital — and the recurring fees from managing it — that must be routinely invested. Right now, there’s a talent crunch for investment professionals that have experience with both private credit and insurance.

Some alternative managers have also tapped the market by buying a company outright or taking a stake in an insurer. Apollo Global Management, Brookfield Corporatio, and KKR have all three pursued an ownership model or a “balance-sheet heavy approach, which subjects the alternative manager to insurance risks but also provides it with the benefits of insurance earnings.”

Other alternative managers, such as Blackstone, have taken minority investments in insurers, earning management fees without bearing insurance risks.

Collectively, U.S. life and property and casualty insurance companies with any level of private equity ownership had total investments as of year-end 2022 of $533.7 billion (almost entirely in the life sector), comprising 6.5 percent of the overall U.S. industry’s $8.2 trillion, according to the National Association of Insurance Commissioners (NAIC). Alternatives firms still only manage a small portion of the industry’s assets today, but their share has increased by 70 percent since 2018, when it was 5 percent of the industry.

There are benefits to insurers and alternatives firms leaning more heavily on each other but insurers’ embrace of private credit is worrisome to Moody’s.

“Alternative asset managers’ expertise in private credit has increased incremental returns on insurance portfolios. Nonetheless, reliance on higher-yielding private credit assets, most of which are structured as investment grade to be included in insurers’ portfolios, does add risk,” said Dean Ungar, a vice president at Moody’s.

“Although structuring and investing in more senior positions provides protection to creditors, these investments have lower liquidity and transparency than corporate bonds, and some have not been tested in a prolonged economic downturn,” he added.

Barings, the $351 billion asset manager, also published a report in April about the perils insurance companies are facing right now, including liquidity problems.

To be sure, Moody’s is not predicting a demise of either the insurers invested in private credit or the asset managers supplying it. But beyond any investment performance implications, the new entanglement of insurers and alternative asset managers poses another risk: greater political and regulatory scrutiny.

“Insurers are subject to regulatory oversight,” Moody’s said in its report. “The growing involvement of alternative asset managers in insurance has highlighted legitimate questions and concerns from regulators and politicians over the potential for increased investment risk and implications for policyholders.”

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