2025 US Insurance Investment Outlook: Seeking Spreads Amid Regulatory Shifts

• With public credit spreads at all-time tights, we expect insurers will continue to allocate to private assets with spread advantages, including direct lending, real estate, infrastructure projects, and other asset-based opportunities. We expect the demand for privates to drive growing strategic partnerships between insurers and asset managers. In turn, successful partnerships should allow insurers to gain increasing access to attractive alternative asset markets in 2025.

• We expect leveraged finance to retain its appeal for insurers seeking to lock in higher yields amid a non-recessionary higher-for-longer interest environment across both public and private markets. Relative to single-name corporates, pooled securitizations such as high-quality CLOs and asset-based structured securities may offer greater income advantages as well as diversification benefits.

• With the inaugural implementation of the NAIC’s principles-based bond definition (PBBD) in use for 2024 annual statement filings, more granular insurance investment data will become available by May 2025. The data will shed light on ABS sector allocations, affiliated investments concentrations, and potential knock-on effects on statutory capital and surplus for select insurers.

• Massive offshore reinsurance activities are attracting attention from regulators globally, which have proposed more detailed disclosures and the use of collateralized/funded reinsurance.

The year has kicked off with all-time tight public market credit spreads amid a flat to slightly upward-sloped yield curve, making public fixed income and long-duration assets less compelling. Against this backdrop and the continued evolution of global regulations, where can insurers find attractive investment income and credit spreads in 2025?

Private markets beckon as public credit spreads hit record tights

As the search for income and spreads intensifies, we expect insurers with healthy liquidity to capture illiquidity premiums by investing in private credit, including direct lending, real estate, and infrastructure projects. While banks have pulled back from private credit due to regulatory constraints, insurers have stepped in as an alternative lender. Though we recognize that bank regulations will likely loosen under Trump 2.0, we expect banks’ leveraged lending to remain constrained in terms of both balance sheet and risk capacity. These constraints are also a key reason banks are increasingly forging partnerships with asset managers and insurers.

Public Credit Spreads Are Historically Tight

Source: JPM CLOIE Post-Crisis Discount Margin, Bloomberg US Corporate Spreads, February 2025.

We expect insurers to maintain a significant role in direct lending, given their strong liquidity profile, limited policyholder surrender risk, and expertise in asset-liability management. Unlike banks, insurance balance sheets generally offer a natural fit for less-liquid assets, since insurers often have long-dated and sticky liabilities. For example, the US life industry exhibits a healthy 2x liquid asset to current liability ratio.1 The NAIC has also previewed favorable outcomes from its liquidity stress testing on life insurers subject to Actuarial Guidance 53 (AG53).2 Given 2024 rate cuts, US life insurers are seeing declining surrender rates, which further reduces their liquidity needs. In addition, to further enhance their liquidity and investment returns, sophisticated insurers continue to utilize tools such as funding agreement-backed notes (FABNs) and FHLB lending.

Relative value opportunities in leveraged finance and CLOs

We expect leveraged finance to retain its appeal in 2025 across both public and private markets, with some insurers seeking income by locking in a higher fixed-rate yield in the current higher-for-longer interest rate environment. Our base case is that we are in a rare non-recessionary rate-cutting cycle that should support credit performance, particularly for leveraged finance. While the fundamental strength in credit metrics may have peaked, it started from a high base and should remain robust. We expect leveraged loan defaults, including liability management exercises (LMEs), to stay near historical averages.3 That said, more recently, market expectations on rate cuts have been moderating because of inflationary concerns arising from ongoing tariff wars.

CLOs continue to offer relative value, largely due to their complexity and perceived illiquidity premium versus single-name corporates. Pooled investment products such as CLOs also offer diversification benefits versus single-name corporates. In addition, 144A CLOs offer better liquidity relative to private credit. We believe senior CLO tranches are attractive despite pending NAIC model-based designations for CLOs and revised NAIC CLO risk-based capital (RBC) guidance to be finalized as early as year-end 2025. Separately, private asset-based financing may offer an additional spread advantage because it is relatively new and due to its illiquidity and complexity.4

Key regulatory developments to watch in 2025

We expect 2025 to be another year of evolving regulations. Several important NAIC adoptions became effective on 1 January this year, including implementation of the NAIC’s principles-based bond definition (PBBD), mandatory submission of rating rationale reports for private letter ratings, and NAIC discretion over filing exemption. In addition, the NAIC intends to better align the statutory treatment of funds under various legal forms, such as exchange-traded funds, mutual funds, and private funds.

With the implementation of the PBBD now in effect for 2024 annual statement filings, we expect more granular asset allocation data to become available by May 2025. Overall, private equity (PE)-owned insurers tend to hold more asset-backed securities (ABS) – as much as 50% of their investment portfolios, versus 25%-33% for US insurers overall.5 Annual filings for 2024 will shed significant light on insurance asset allocations to over two dozen different types of ABS and affiliated investments.

We expect the impact on statutory capital and surplus to vary by insurer. Under the PBBD, insurers must move assets not qualified for Schedule D-1 bond reporting to Schedule BA. This could result in a growing BA bucket for select insurers and have potential knock-on effects on reducing statutory capital and surplus. Separately, the NAIC is still working on risk-based capital revisions for CLOs and ABS broadly, and the new RBC factors, once adopted, may also affect insurers’ investment RBC. Overall, since PE-owned insurers tend to hold a greater share of structured assets, the effect may be more pronounced for these firms.

Regarding private securities, regulators globally have converged on greater disclosure requirements. In the US, the NAIC has requested that insurers upload rating rationale reports for private letter ratings for further review. The NAIC also gained the discretion to lower credit ratings for its designation purposes, although it may do so only sparingly. To gain more visibility around asset risks, the Bermuda Monetary Authority (BMA) proposed that insurers should submit security-level information in addition to portfolio-level data.

Offshore reinsurance has garnered growing attention from global regulators. US life insurers ceded $2.3 trillion of reserves from 2017-2023, and 40% – or approximately $1 trillion – were reinsured offshore (with 80% in Bermuda and 10% in the Cayman Islands).6 The NAIC, the BMA, and the UK Prudential Regulation Authority have all released additional guidance, including disclosure requirements and guidance for the use of collateralized/funded reinsurance.

For more insights into our outlook for 2025, visit PineBridge's 2025 Investment Outlook: Finding Alpha as the Cycle Turns.