Insurers Embrace Private Credit to Boost Yields Despite Liquidity Risks

What's New

According to S&P Global Ratings analysts Carmi Margalit and Neil R. Stein in their October 2025 report, private credit investments now represent approximately 6% of U.S. life insurers' total portfolios (roughly $289 billion), while property/casualty insurers maintain minimal exposure at just 1%. Despite this growth, no insurer ratings have been downgraded due to private credit exposure, as S&P assesses that companies are adequately managing the heightened illiquidity and complexity risks associated with these investments.

Why It Matters

This shift represents a fundamental evolution in how insurers generate returns in a challenging yield environment. As traditional public bond markets offer compressed spreads, private credit provides insurers with an additional 25-200 basis points of yield pickup compared to similarly rated public bonds. However, this yield enhancement comes with meaningful tradeoffs in liquidity and transparency that could become problematic during periods of market stress or when insurers face unexpected claim surges.

Big Picture Drivers

• Yield enhancement imperative: Insurers are pursuing private credit to capture illiquidity and complexity premiums that boost portfolio returns by up to 200 basis points over comparable public bonds.

• Portfolio diversification strategy: Private credit reduces reliance on public markets by spreading risk across middle-market lending, asset-backed finance, infrastructure projects, and bespoke lending solutions.

• Life insurer structural advantage: Companies writing long-dated, stable liabilities with limited withdrawal options possess inherent capacity to absorb illiquidity risk that private credit investments demand.

• Regulatory capital efficiency: Investment-grade tranches of structured private credit vehicles allow insurers to access speculative-grade underlying assets while maintaining favorable capital treatment.

• Asset-liability matching complexity: Floating-rate private credit assets require sophisticated hedging strategies to align with insurers' fixed-rate liability profiles.

By The Numbers

• $312 billion: Traditional private placements held by U.S. life insurers as of December 31, 2024

• $218 billion: Private credit bonds (privately placed, privately rated corporates) in life insurer portfolios

• 72%: Proportion of life insurer bond holdings concentrated in corporate and non-mortgage structured finance securities

• 47%: Share of P/C insurer portfolios allocated to corporate and non-mortgage structured finance bonds

• 25-200 basis points: Typical yield premium private credit offers versus comparable public market securities

Key Trends to Watch

• Accelerating life insurer adoption: S&P expects private credit's share of life insurer investment portfolios to continue expanding as companies leverage their capacity to hold illiquid assets against long-duration liabilities.

• Enhanced regulatory scrutiny: As private credit allocations grow, regulators and rating agencies are conducting more frequent asset class-specific deep-dives to assess concentration risks and management capabilities.

• Credit quality convergence: The rating distribution of private credit bonds closely mirrors that of public corporate bonds, suggesting insurers maintain disciplined underwriting standards despite the illiquidity premium.

• P/C sector constraints: Property/casualty insurers face structural barriers to significant private credit adoption due to unpredictable, short-term liability profiles requiring immediate claim payment readiness.

The Wrap

Private credit has emerged as a strategic tool for insurers seeking yield enhancement and diversification, but success depends entirely on sophisticated risk management capabilities. Life insurers' natural ability to hold illiquid assets positions them to capitalize on this trend, while P/C companies remain appropriately cautious given their liquidity requirements. As this market matures, the critical differentiator will be each insurer's ability to navigate the complexity premium while maintaining robust asset-liability matching and stress-tested liquidity positions.