Private credit, especially asset-based, set to keep growing for insurers - Moody’s Research

Insurers are set to keep increasing their private credit holdings in the coming years, especially the asset-based finance segment, according to a Moody’s Ratings report published June 4.

Almost 80% of insurers surveyed said they plan to expand their holdings of at least one area of private credit over the long term. Moody’s surveyed 30 insurers with total invested assets of approximately $5.3 trillion during the first quarter of the year.

Appetite among insurance companies was highest for asset-based finance and private placement, with 44% expecting to increase allocations in that segment of private credit over the long term. Asset-based finance includes consumer assets, trade receivables, plant and equipment, airplanes and trains.

Next was mid-market lending and infrastructure lending with 33% of insurers planning to increase allocations followed by fund finance at 28%.

Part of the draw of asset-based finance is how “diversified the collateral is,” with many segments not strongly correlated to public asset classes, said Will-Keen Tomlinson, a vice president with Moody’s private credit team and a report author.

“It (asset-based finance) tends to be quite lender friendly. The covenants are quite strong and they are very customizable asset classes,” he said.

Private credit currently accounts for 36% of insurers’ total investment in the U.S., according to Moody’s data. Meanwhile, for insurers based in the Asia Pacific region, private credit only makes up 6% of total investments.

“With the shift to higher levels of private credit, firstly, it is a pretty measured shift,” Tomlinson said of the insurer space. “We wouldn’t expect that figure to go from 36% to 45% in the next five years.”

In the U.S. in particular, the figure reflects what Tomlinson describes as a “symbiotic” relationship between insurers searching for return and having long-term capital and managers needing inflows for asset origination.

The growth in private credit allocations for insurers in investment grade areas, “really is a reallocation from public corporate credit,” Tomlinson said.

While private credit assets rarely have public ratings, insurers are relying on their own analysis and that of their asset managers, with Moody’s noting that insurers’ private credit assets are “mainly investment grade.”

The private credit space has boomed in recent years and now accounts for over $1.7 trillion in assets. Many managers are expecting to see more growth in the coming years with Ares Management’s CEO and president Michael Arougheti recently saying he expects the private credit market growth to double over the coming five years.