Insurers and private assets’ marriage of convenience

As insurance companies increasingly invest in private asset managers, a new financial ecosystem is emerging. Private asset managers focus on improving expected returns, while insurers’ capital-intensive frameworks are designed to safeguard clients’ assets. Despite the contrast, the two financial models increasingly overlap. We look at the rationale behind the convergence, and the resulting opportunities and risks.

Over the last decade, the insurance industry’s allocations to private assets has more than doubled in both North America and Europe. Of the more than USD 40 trillion of assets on global insurers’ balance sheets at the end of 2024, private assets represented over one third of North American issuers’ portfolios, and around one fifth of their European peers’. Europe’s more ‘traditional’ allocations are now mostly allocated to real estate direct investments and mortgages, while North America’s insurers are among the largest institutional investors in private credit, including structured debt instruments.

In addition, the proportion of North American insurance companies owned by private asset managers rose to 19% at the end of 2024, from 12% in 2018, according to the US National Association of Insurance Commissioners and the Canadian Employment Insurance Commission. Collectively, these insurers managed approximately USD 610 billion of assets.

Over the last decade, the insurance industry’s allocations to private assets has more than doubled in both North America and Europe

Strategic investments by private asset firms are concentrated in North American life insurers, which typically operate either a ‘spread-based’ or ‘fee-based’ model. Spread-based models typically transfer both long-duration assets and liabilities – or reserves - to the asset manager, earning the manager a yield spread that corresponds to the difference between the average yield of investment portfolio assets – or running yield - and the average crediting rate granted to life policyholders – or liabilities. This is a capital-intensive model as all of the insurance and investment risks are held on the private asset manager’s balance sheet.

In contrast, the fee-based model is a more capital-light business; the life insurer retains the risks of both the assets and actuarial liabilities on its balance sheet and pays fees to the alternative asset manager for managing either its general account or a segregated mandate - off-balance sheet assets.

In Europe, the picture is different. Instead of buying entire insurance companies, alternative asset managers typically take over insurance assets. These life insurer-private asset partnerships are neither full nor partial mergers. Instead, they either transfer legacy life insurance policies that are no longer for sale (i.e. run-off portfolios), or create risk-sharing agreements between insurers and reinsurers. Over the last five years, this method has moved more than EUR 300 billion of liabilities off European life insurers’ balance sheets.

Why are private assets attractive to insurers?

Insurers’ business models are an exercise in asset-liability management: investing premiums into income-generating financial instruments to match cash flows and duration liabilities with future obligations. These take the form of claims and benefits owed to policyholders. In markets with plentiful long-duration bonds generating attractive yields, insurance companies would meet all their liabilities through financial instruments. But today’s persistently low-yield environment and relatively scarce long-duration listed bonds make this more challenging.

This explains the attractions of private assets for insurers; illiquid assets held over the long term, mainly in unlisted structured credit instruments, can match insurers’ liabilities and generate higher risk-adjusted yields compared with listed credit instruments of the same quality or rating. Some types of unlisted credit, including direct investments in real estate, often provide stronger collateral and allow insurers to customise loan structures that better match their liabilities. In addition, these assets diversify sources of cash flow beyond traditional bonds, many of which are backed by income linked to real estate.

Why are alternative asset managers attracted by the insurance industry?

Life insurers carry significant asset leverage because they aim to match their liabilities with assets of the same duration. This makes them attractive to alternative asset managers in their quest for asset sourcing. Insurance assets provide more stable, permanent capital than traditional funds because annuity policyholders, for example, cannot withdraw their funds. At the same time, insurers’ long-duration liabilities push them towards illiquid assets, especially private credit, which offer higher returns than public markets. Another factor is that insurers offer resilient cash flows with stable dividends.

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Underappreciated risks and regulation

The convergence of the insurance industry with private assets has created a financial ecosystem managing assets of USD 58 trillion, of which USD 12 trillion were in private assets as of end-2024, according to S&P Global. Regulators have raised concerns, including the danger of valuation errors resulting from the long-term and illiquid nature of unlisted private assets. They also point to credit rating concerns, which unlisted assets of course lack. This forces insurers to rely on their own views. As a result, we cannot rule out the dangers of them underestimating private credit asset risk and its impact on capital requirements. Finally, there is also a potential for conflicts of interest, where an alternative asset manager oversees private assets for an insurance entity it owns or controls.

Regulators have raised concerns, including the danger of valuation errors resulting from the long-term and illiquid nature of unlisted private assets

Legislators and governments worldwide are aware of potential risks but are encouraging private asset investments on insurers’ balance sheets. This reflects insurers’ search for productive investments in developed economies’ low-yield, soft economic growth environments. Recent regulatory reforms illustrate this shift. In the UK, for instance, regulators allow life insurers to boost private asset holdings by moving assets from unfunded defined benefit pensions into defined contribution plans they manage (i.e. bulk purchase annuity or pension risk transfer). In North America and Europe, life insurers can allocate more to high-yielding long-term equity, mainly in the form of infrastructure investments. In Europe, life insurers will shortly be allowed to invest more in securitised assets, giving insurers the ability to add lower-grade credit to their portfolios.

This underscores the importance of a selective approach to investing in the insurance sector

Private assets have become a vital component of portfolios for both institutional investors and high-net-worth individuals, driven by the pursuit of diversification, the illiquidity premium – higher returns for committing capital over extended periods – and long-term value creation. As yield-seeking investors that aim to meet policyholder obligations, life insurers are expected to continue increasing allocations to private assets. However, such investments also raise concerns around valuations and potential underestimation of risks. This underscores the importance of a selective approach to investing in the insurance sector. We favour fee-based business models supported by efficient operating processes, and seek to avoid highly capital-intensive ecosystems that carry elevated balance sheet risks.