Life insurers that team up with alternative investment managers seeking higher returns have increased their exposure to private credit and the risks that come with it, says Fitch Ratings.
In a report, the rating agency said that compared with the traditional life insurance industry, companies that are affiliated with alt mangers have a greater share of their portfolios in private assets and structured securities, and invest more heavily in instruments with lower credit ratings.
For instance, it reported that as of the end of 2024, alt manager-affiliated insurers had 24% of their total financial assets in so-called “level III” assets — which are illiquid, hard-to-value assets that aren’t readily marketable — compared with only about 6% for traditional insurers.
This allocation to illiquid assets was also on the rise, up from 18.5% in 2022, Fitch noted — adding that this growing exposure to these kinds of assets “can increase valuation, liquidity and concentration risk, adding to the structural complexity and opacity of these investments.”
However, while the private credit segment is currently displaying certain “bubble-like” characteristics — such as rapid growth and rising leverage, spread compression, intensified competition and rising retail participation — Fitch said it doesn’t view the risks as potentially systemic for insurers.
“Private credit is typically facilitated through funds with committed capital, limited redemption risk and moderate fund-level leverage, and is still a relatively small portion of the overall financial system,” it said.
Additionally, Fitch noted that the riskiness of these kinds of investments is “partially mitigated” by insurers’ investment diversification, strong asset-liability management, and healthy capital levels.