Insurers are set to keep increasing their private credit holdings throughout the coming years, with almost 80% saying they plan to increase their holdings of at least one class of private credit over the long term, according to a recent analysis by Moody’s.
Private credit accounts for 36% of insurers’ total investments across the United States, compared with just 6% in Asia Pacific (APAC).
Moreover, analysts explained that private markets are most mature in the US, and a growing number of US insurers have close relationships with alternative asset managers, which improves their access to private credit.
Moody’s recently conducted an investment survey which showcased that almost 80% of respondents are planning to increase their holdings of at least one class of private credit over the long term.
The survey also highlighted how growth appetite is highest in asset-based finance and private placements, with 44% of respondents expecting to increase long term allocations, followed closely behind by mid-market lending and infrastructure lending (33%) and fund finance (28%).
An interesting factor to pinpoint, is how private credit still remains an evolving asset class outside of the US, UK and Europe. A number of organisations in Japan, Hong Kong, Korea and the United Arab Emirates (UAE) have appetite for a measured increase in their currently low allocations, analysts noted.
However, some insurance firms that Moody’s spoke to reportedly have allocations to mid-market lending in the range of 2-3% total investments.
“Companies in these regions invest heavily overseas, especially in US and European assets. There are active local private credit markets, but they are typically small,” analysts said.
Moody’s also explained that on a global basis, insurers’ private credit assets are concentrated toward real estate lending, infrastructure lending and private placements with corporates.
While, the remainder genuinely tends to consist of asset-based finance, mid-market lending and fund finance such as subscription credit facilities, net asset value (NAV) loans and rated feeder funds.
Moving forward, analysts noted that private credit assets give insurers more “flexibility to match their liabilities,”, as well as the ability to generate additional spread earnings to compensate for their relative illiquidity.
As well as this, private credit assets also offer insurers stronger covenant protection, and provides them with access to diverse investments with low correlation to public markets.
But, analysts also warned, that significant private credit investment without strong asset-liability management is highly
credit negative. Nonetheless, private credit assets also have less external transparency than comparable public assets which makes monitoring of risk more difficult for third parties, analysts added.
However, despite these several negatives, analysts noted that the benefits from growth in private credit will outweigh the risks.
Will-Keen Tomlinson, a Vice President with Moody’s Private Credit team, commented: “Higher private credit exposure does not necessarily signal increased appetite for investment risk. Rather, many insurers have reallocated part of their portfolio toward less liquid assets of similar credit risk because they feel these investments now offer sufficient additional compensation for their lower liquidity.”
