Insurers investing in personal credit score are managing the dangers effectively, says S&P World Rankings, who predicts that its share of their funding portfolios will improve additional.
The scores company stated that its scores on insurers haven’t been affected by elevated investments in personal credit score as a result of the asset class nonetheless represents a comparatively small portion of their complete investments and the added dangers are effectively managed.
It famous the advantages of investing in personal credit score, together with increased yields and portfolio diversification.
“Our evaluation means that, on common, insurers can decide up wherever between 25 foundation factors and 200 foundation factors of yield on a non-public credit score bond, in contrast with a equally rated public bond, relying on the tenor, asset class, and market circumstances,” S&P stated in a report.
“Moreover, personal credit score may also help insurance coverage corporations diversify their portfolios, decreasing their reliance on public markets and spreading danger throughout varied asset courses. This diversification is useful for managing liabilities and ensuring insurers can meet their obligations to policyholders.”
Nevertheless, S&P additionally highlighted potential dangers round illiquidity, as insurers want to keep up liquidity to satisfy policyholder claims, and the complexity of personal credit score investments.
Personal credit score has been rising in reputation amongst insurers, notably life insurers who write long-dated liabilities with restricted or no withdrawal choices, so have vital capability to tackle liquidity danger.
Learn extra: Structured credit score piques insurers’ curiosity
Various personal credit score companies have been partnering with life insurers to learn from this pattern.
Final month, it was introduced that US life and well being insurer CNO Monetary Group is buying a minority stake in asset-backed credit score specialist Victory Park Capital.
And final yr, Golub Capital entered right into a strategic partnership with Nassau Monetary Group, offering Nassau’s insurance coverage subsidiaries with entry to its center market direct lending methods. It additionally took a minority stake in Nassau.
Learn extra: Insurers’ publicity to personal credit score market raises questions
Whereas S&P stated personal credit score was not at present impacting its scores on insurers, it stated that it’s going to proceed to observe its inclusion of their portfolios.
“Whereas personal credit score has change into a extra significant a part of insurers’ portfolios, particularly for the life sector, it’s nonetheless a comparatively small a part of the trade’s greater than $8tn (£6tn) of invested belongings,” the scores company stated.
“Nevertheless, as personal markets proceed to develop usually, it’s seemingly that life insurers specifically will proceed to flex their capabilities to tackle liquidity danger and handle advanced belongings to reap the advantages of upper yields and larger range. We additionally count on that property/casualty (P/C) corporations will diversify their funding portfolios with this asset class.
“It’s incumbent on the trade to deal with this development responsibly, rigorously managing the illiquidity and complexity these belongings convey. We’ll proceed to observe and report on this pattern whereas incorporating its dangers into our scores of each the life and P/C insurers concerned.”
Learn extra: S&P predicts report US personal credit score and mid-market CLO issuance in 2025
