Private Credit Remains a Hot Item for Insurance Companies

Insurance companies have the same concerns as other investors when looking into 2024, but that’s not stopping their plans to increase the risk in their portfolios and keep putting more money into private credit.

When asked by Goldman Sachs Asset Management to rank their top macroeconomic concerns, chief investment and chief financial officers at insurance companies largely agreed on a short list. Half of them (52 percent) said an economic slowdown or recession in the U.S. was the biggest threat to their investment portfolios, followed by credit and equity market volatility (48 percent), and geopolitical tensions (46 percent), according to GSAM’s 2024 annual insurance report based on a survey early this year of 359 executives from a mix of insurance companies and regions.

Inflation risk wasn’t as worrisome as it was last year; 42 percent of insurers said inflation was one of the greatest macroeconomic risks, down from 55 percent in 2023. Despite those macro concerns, “risk appetite remains healthy” at insurers this year, according to GSAM’s report. Seventeen percent of companies plan to add overall risk to their portfolios, primarily by investing more in private assets (an ongoing trend that Barings has warned could cause liquidity problems for life insurers) and especially private credit.

Although 59 percent of insurers are uneasy about the credit cycle entering a later stage, 35 percent look to increase credit risk in their portfolios over the next 12 months and half of them (53 percent) ranked private credit among the top five asset classes with highest expected return in 2024.

“Insurers remained aggressively allocating to private credit,” Matthew Armas, global head of Insurance at GSAM, said during a conference call about the report. “This is the first time we’ve seen a fixed income asset as the highest expected return asset class in our survey.

Allocations to investment-grade private debt also remain strong; 33 percent of insurers intend to increase their allocations to the asset class, “a very sizable increase in private allocation,” Armas said.

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 are part of insurers’ traditional allocations to private equity, 20 percent 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.

“Last year marked a fixed income renaissance as insurers renewed their interest in the asset class. This year, they are focused on accelerating allocations,” the GSAM report said.

Insurance companies also plan to boost their allocations to other asset classes. Almost one-third of them plan to invest more in infrastructure, 27 percent are investing more in private equity, and 25 percent are investing more in green or impact bonds, among other asset classes.