In a recent analysis by Fitch Ratings, private credit investments have emerged as crucial components of the business models and investment strategies of rated US life insurers.
While concerns about asset quality in the private credit sector have been raised, Fitch does not anticipate widespread rating pressures for these insurers, primarily because most of their exposures in private credit assets are relatively small when compared to other asset classes, which helps mitigate downside risks.
One notable trend highlighted in the report is the substantial growth in private credit investments among alternative asset manager (Alt IM)-owned insurers.
These insurers have witnessed an impressive Compound Annual Growth Rate (CAGR) of approximately 8.0% in their GAAP basis invested assets from year-end 2019 to June 30, 2023.
This stands in stark contrast to the broader universe of rated US life insurers, which experienced a decline of 0.6% in invested assets during the same period.
Private credit borrowers are currently grappling with higher debt service burdens due to rising policy interest rates and slower EBITDA growth, which can be attributed to various macroeconomic challenges.
The increased leverage of borrowers and a relative deterioration in private credit terms and conditions further add pressure on credit quality.
For US life insurers with more substantial allocations to private credit assets, there is the possibility of incremental liquidity risks during periods of market stress. This is particularly pertinent as market participants favour assets with greater pricing visibility.
However, the report also notes that these concerns are partially mitigated by the strong asset-liability management of Alt IMs. They maintain assets and liabilities of similar durations and a well-structured liquidity profile, reducing the potential for forced selling.
Additionally, Alt IMs possess significant expertise in assessing liquidity, structure, and credit quality characteristics of privately placed credit risk, bolstering their risk management capabilities, the report noted.
The growth in private credit investments is primarily attributed to the expansion of the private credit market and increased allocations.
Alt IMs have been actively acquiring and forming partnerships with life insurers, particularly those with a focus on the annuity market.
Looking ahead, Fitch Ratings predicts that future partnerships between Alt IMs and insurers will lean towards taking minority stakes in life insurers or investing in sidecars and offshore reinsurance platforms.
This strategic shift indicates the evolving landscape of the insurance industry and the continued importance of private credit investments in shaping the strategies of US life insurers.