Insurers are playing a central role in establishing a new market paradigm. The maturation of private markets has led to profound change across the global investment landscape. Private markets are experiencing rapid growth. Meanwhile, public equity markets have become dominated by fewer companies with greater concentration at the top, and in public debt markets, banks have been retrenching from lending since the Global Financial Crisis and the implementation of Dodd-Frank regulations.

In a rethink of their investment approach, insurers are increasing their allocations to private credit and structured asset strategies, underpinning the expansion of private markets. As this insurance-driven shift continues to evolve, it will be imperative for investors to understand the possible implications for liquidity management, pricing transparency and risk management, as well as the emerging opportunity set.

Some examples of past paradigm shifts include the 1980s boom of the junk-bond market, which swelled from $10 billion in 1979 to $189 billion in 1989.¹ Junk bonds were instrumental in the financing of leveraged buyouts, which in turn ignited a rapid expansion in private equity, as long-term allocators such as pension and endowment funds focused on alternative assets. The rise of passive investing and its impact on public markets, including a decline in the number of public companies, also led to significant change in market structures. It is from the nexus of private markets and insurance that a new market paradigm is emerging.

While insurance is certainly not new, insurers representing a source of "permanent capital" is a more recent phenomenon. The U.S. insurance market grew 331% from 2000 to 2021,² and its total value was estimated at $1.2 trillion by the end of 2023.³ Furthermore, annuities sales were $216.6 billion during the first half of 2024, representing an increase of 20% from the same period a year earlier and putting the market on pace for a third consecutive annual sales record.⁴

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.}