Three asset classes for European insurers to watch in 2026

For insurance investors, these conditions create a difficult balancing act: deploying premium income in a way that generates sustainable returns and preserves capital strength while remaining consistent with regulatory, liquidity and accounting constraints. Traditional asset classes offer limited margin for error, increasing the cost of sub‑optimal allocation decisions.

Against this backdrop, value is more likely to emerge in targeted segments where structural, regulatory and technical factors continue to work in investors’ favour. We believe three asset classes remain particularly attractive for insurers in 2026.

1. STS ABS: attractive relative spreads and capital efficiency

Simple, Transparent and Standardised (STS) asset‑backed securities (ABS) have continued to appeal to UK and European insurers, supported by attractive relative spreads and favourable regulatory treatment.

The unwinding of quantitative easing programmes has left ABS spreads attractive relative to history and compared with similarly rated corporate bonds. As the market has become increasingly driven by real‑money investors, spreads on STS transactions often price wider than equivalently rated corporates despite strong historical performance and low loss‑given‑default characteristics.

STS ABS also benefits from particularly favourable treatment under Solvency II, with spread capital charges expected to decline further from January 2027 following the Solvency II review. This enhances an already compelling return‑on‑capital profile for standard‑formula insurers.

2. Flexible total return credit — a dynamic response to tight spreads

Global credit spreads have remained persistently tight despite geopolitical tensions and gradually softening fundamentals. This creates limited upside potential and asymmetric downside risk for traditional buy‑and‑hold credit portfolios.

Rather than relying on costly and complex credit protection strategies, a flexible total‑return approach, such as the one employed by the M&G Total Return Credit Investment strategy, can allow active management of credit quality and spread duration. Reducing exposure when valuations are rich, and adding risk when spreads widen, can materially improve risk‑adjusted outcomes.

For insurers constrained by governance and operational structures, outsourcing such flexibility can help capture market opportunities that are difficult to execute internally.
 

3. Defensive European direct lending: non‑sponsored and senior opportunities

We believe private credit remains a strategic allocation for insurers given its liability‑matching characteristics and income generation potential, although tighter spreads in some segments now demand greater selectivity.

Market “white spaces”, such as non‑sponsored direct lending and lower to core mid-market senior direct lending, typically offer lower leverage, stronger collateral and more bespoke covenant protection, while avoiding competitive mid‑ to large‑cap unitranche‑led processes that compress spreads.

Senior direct may also enable insurers to sit at the top of the capital structure while earning a premium to traditional senior secured loans, but with a more balanced risk profile than mainstream unitranche direct lending. Bank retrenchment and elevated refinancing needs have improved lender terms, making this a particularly attractive opportunity set in 2026, in our opinion.

Global private credit markets are set to continue their recent rapid expansion, with Europe expected to grow more rapidly than the US. This reflects ongoing bank retrenchment and the relatively less mature stage Europe is at in terms of embracing a more capital-markets driven lending environment. However, being a less competed market, Europe has been able to provide investors with superior risk-adjusted returns. In recent years private credit in Europe has offered superior spreads together with higher interest cover, lower default rates, tighter protections and more disciplined covenants¹.
 

Liability matching: life and P&C considerations

Asset allocation decisions for insurers are closely linked to liability characteristics. While Life and Property & Casualty (P&C) insurers operate within the same Solvency II framework, their liability profiles differ, influencing portfolio construction priorities.
 

Life Insurers: duration, predictability and asset liability matching (ALM) efficiency

Life insurers are primarily exposed to long‑dated, predictable cash‑flow liabilities, often extending 10–30 years or more. For these balance sheets, the objective is not maximising nominal return, but locking in contractual cash flows that match liability duration, reduce reinvestment risk, and optimise capital efficiency.

Assets that are particularly well suited can include:

• Private credit and infrastructure debt, offering long‑dated, amortising or bullet cash flows aligned with liability run‑off profiles
• High‑quality investment-grade (IG) credit, which supports cashflow/duration matching versus liabilities
• STS ABS, with the potential to be a higher yielding alternative to cash, while benefiting from favourable Solvency II treatment
• Floating‑rate or partially amortising structures, helping manage uncertainty around inflation and long‑term rate paths

By reducing duration gaps and cash‑flow mismatches, these assets contribute to more stable Own Funds and lower balance‑sheet volatility across the cycle.
 

P&C insurers: liquidity, capital efficiency and downside protection

P&C liabilities are typically shorter‑dated and less predictable, placing a premium on liquidity, capital flexibility, and claims‑paying resilience.

As a result, P&C portfolios tend to favour:

• Liquid public IG credit for rapid rebalancing and cash availability
• STS ABS, combining liquidity with strong capital efficiency
• Selective private‑credit allocations, sized conservatively to enhance diversification without compromising liquidity

For P&C insurers, the dominant objective is often maximising return per unit of Solvency Capital Requirement (SCR) rather than pursuing maximum absolute yield.