S&P Global Ratings, a provider of credit ratings, research, and analytics, reports that private credit is increasingly becoming a significant part of North American insurance companies’ investment portfolios.
According to S&P, this shift reflects broader trends within the financial services industry, where insurers and other fixed-income investors are turning to private credit as a means of achieving greater portfolio diversification and higher yields.
While private credit offers attractive opportunities, S&P Global Ratings emphasises that it comes with inherent risks, particularly illiquidity and structural complexity.
Insurers must actively manage these risks through careful liquidity planning, robust asset-liability matching, and comprehensive risk management programmes.
S&P’s analysts note that, to date, the growth of private credit has not impacted insurer credit ratings, as these investments still represent a relatively small share of total portfolios and the associated risks are generally well managed.
Private credit typically appears on insurers’ balance sheets in the form of privately placed corporate bonds and non-mortgage structured finance (NMSF) bonds.
S&P observes that while most corporate and NMSF bonds trade in public or institutional markets with publicly available ratings, private credit instruments are usually privately placed and carry private ratings, making them less transparent and less liquid.
Life insurers generally hold a larger portion of private credit compared with P&C insurers, reflecting their long-dated and more predictable liabilities. According to S&P analysis as of December 31, 2024, life insurers held roughly $218 billion in privately rated corporate bonds and $71 billion in privately rated NMSF bonds, whereas P&C insurers held only a fraction of that amount.
S&P points out that private credit is not explicitly disclosed in insurers’ statutory or GAAP financial reports. Some insurers provide supplemental disclosures, but these are neither standardised nor mandatory, meaning analysts must rely on the distribution method and rating transparency to identify private credit holdings.
Despite these limitations, S&P’s research indicates that privately placed, privately rated bonds constitute the majority of private credit investments in insurers’ portfolios.
The benefits of private credit, according to S&P, are clear. These investments can enhance yields by 25 to 200 basis points compared with similarly rated public bonds, depending on the asset type and market conditions. Private credit also allows insurers to diversify their investment portfolios beyond public markets, spreading risk across asset classes and supporting their ability to meet obligations to policyholders.
S&P highlights that life insurers’ capacity to hold illiquid investments is greater than that of P&C insurers, owing to the long-term nature of life insurance liabilities, while P&C insurers must maintain liquidity to pay for unpredictable claims.
However, S&P Global Ratings cautions that private credit introduces complexity. Many private credit investments involve customised agreements, floating-rate interest, and intricate structures that require deep understanding of borrower creditworthiness, collateral, and deal mechanics.
S&P analysts assess insurers’ risk management capabilities to ensure that companies have the expertise to address these challenges, and they incorporate the findings into the rating framework. In some cases, S&P adjusts capital charges or risk position scores to reflect concentration or residual risks in private credit portfolios.
Credit quality of private credit holdings is generally aligned with other corporate and NMSF bonds. S&P reports that most private credit is held indirectly through investment-grade tranches of structured finance securities or fund-finance bonds, reducing exposure to speculative-grade assets.
Life insurers show greater utilisation of these bonds than P&C insurers, while ratings on private credit bonds largely mirror those of other investment-grade corporate bonds in both sectors.
Although private credit remains a relatively small component of the insurance industry’s more than $8 trillion in invested assets, S&P expects its share of portfolios to increase, particularly among life insurers.
S&P anticipates that life insurers will continue to expand their private credit holdings, managing liquidity and complexity to capitalise on higher yields and portfolio diversification. P&C insurers may also increase exposure to private credit as they seek additional diversification opportunities.
The company stresses that insurers must handle the growth of private credit responsibly. Effective oversight and robust risk management are essential to ensuring that the benefits of higher returns and diversification do not come at the expense of financial stability.
S&P will continue to monitor private credit trends and incorporate the associated risks into its ongoing rating analysis for both life and P&C insurers.
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