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Insuring the future: The case for diversified private credit
10 min read 3 Nov 25
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Insurers have long relied on the pick-up in corporate spreads over sovereigns as a core investment strategy, but today’s investment landscape is prompting a strategic rethink for European insurers. Private credit has come sharply into focus, this fast-growing asset class can offer insurers a way to tackle key portfolio challenges, boost diversification, and potentially enhance returns. In this paper, we explore how European insurers can harness private credit to help strengthen investment outcomes and build portfolio resilience.
Yield compression:
Corporate bond spreads are now at their tightest levels since the Global Financial Crisis (GFC). This yield compression has significantly reduced the risk-adjusted returns available from corporate bonds, prompting insurers to explore less conventional investment options.
Limited investment universe
For insurers seeking to broaden their opportunity set, with far more companies in the private sector compared to public markets, the potential to optimise diversification utilising private credit is appreciably greater. Added to this, private markets likely offer a more diverse range of sector and geographic exposures than is likely available in public markets. With strategies spanning real estate, infrastructure, direct and asset-backed lending etc, private credit offers exposure to sectors typically exhibiting low or negative correlations with public markets.
Sovereign pressures
Given the difficulties in public credit markets, investors may look to switch some of their public credit into sovereign bonds, an asset class traditionally favoured by insurers. However, the European sovereign market may not be the safe haven is has traditionally been – factors such as rising debt-to-GDP ratios, historically high OAT-Bund spreads and a jittery gilts market since the 2022 ‘mini-budget’, may give investors concerns about rotating too heavily into sovereign bonds. This, combined with the typically lower yields on sovereign bonds, means investors are looking beyond government markets for portfolio optimisation.
Private credit options
Private credit means different things to different people with a diverse range of private credit strategies split across corporate lending and asset backed lending.
Private credit: a strategic fit for insurers?
Insurance investors can access a diverse range of private credit strategies, each with distinct risk/return profiles and liquidity characteristics. Different forms of private credit can therefore be strategically aligned across an insurer’s balance sheet, matching liability profiles and regulatory requirements:
1. Liquidity needs
Insurers do not require their entire portfolio to be liquid as they focus on asset-liability matching. The long-term nature of life insurance liabilities means that insurers can afford to hold assets to maturity, making private credit a natural fit for their investment horizon. General insurers, even though their liabilities are short in duration, also hold illiquid assets in their core portfolios given a large proportion of their book rolls over. This does, however, need to be coupled with careful consideration on new business and claim volatility and General insurers still tend to have very limited core assets in private credit, especially when compared to Life insurers. For both types of insurer though, having the ability to invest in illiquid assets also opens the door to niche opportunities that are often unavailable in public markets.
2. Capital efficiency & regulatory treatment
Insurers can optimise capital efficiency by investing in private credit strategies offering strong returns without excessive capital charges – key for portfolio design and allowing insurers to balance profitability with regulatory compliance.
Under Solvency II’s three-pillar framework, Pillar 1 treats most private, unrated credit similarly with capital charges primarily based on asset duration. However, Pillar 2 (the ‘Pillar of Risk’) within the regulatory regime particularly favours certain private credit options: investments demonstrating stability, resilience, and strong structural features (such as seniority, covenant strength and potentially lower default risk) provide greater assurance for internal risk and investment teams and strengthen ORSA (Own Risk and Solvency Assessment) assessments.
One of the most compelling reasons insurers may be drawn to private credit is yield enhancement. Private credit offers an illiquidity premium (the additional spread investors typically expect in return for accepting reduced liquidity) which gives it a yield pick-up versus equivalently rated public bonds. From the issuers’ perspective, the customisation of debt that the private markets can offer means they see this premium as a price worth paying. Entering into more niche areas, deals can typically offer higher yields due to their specialised nature and limited investor access, providing insurers with a source of alpha and strategic differentiation.
A growing allocation for insurers
Private credit has rapidly become a more important component within insurers’ investment strategies. The trend among institutional investors to diversify their fixed income exposure, has fuelled the growth in the asset class. Despite its relatively short 25-year existence, it is estimated that by 2023 it had grown to a $1.6 trillion asset class globally and is set to grow a further 80% within the next 5-years1.
According to a recent Moody’s Survey2, in 2024, European life insurers allocated 13% (€500 billion) of assets to private credit, although this figure varies significantly between the UK and continental Europe. In the UK, which offers non-surrenderable annuity products, the allocation is higher at 18%, a figure likely to rise further due to the growth in the UK bulk annuity market.
With only a 10% allocation to private credit, continental European life insurers have a lower allocation relative to the UK, principally due to their focus on liquid savings products and profit share mechanisms.
P&C (Property and Casualty) insurers' allocation to private credit will be significantly lower than for life insurers given the illiquid nature of the asset class and the fact they face more immediate and less predictable payout obligations. Though far lower than life insurers, the search for higher yield and increasing supply of private credit issuance is likely to lead to modest growth in this area for P&C insurers as well.
European private credit – higher return for less risk?
Geographically, the US and Europe account for 90% of the global market , the US being twice as large as Europe and significantly more mature - in the US 80% of lending is provided by capital markets, in Europe it is only 30%4.
Greater maturity typically affects key risk and return characteristics. The highly competed US market typically lowers the yield available for investors. Using direct loans as a proxy, it can be seen the European private credit market has historically offered higher return relative to the US.
This superior European return profile is accompanied by higher interest cover and lower default rates: European private credit interest cover is 2.5X versus 2.25X in the US5, while default rates in Europe at 1.1% are lower than the 1.6% seen in the US6. Additionally, European companies historically tend to have more conservative equity cushions.
Considerations when investing in private credit
Once the decision has been made to rotate into private assets, insurers have two routes to market. The first is to select a specific asset class which is usually a function of the strategic asset allocation (SAA). This requires risk committee consideration, internal approvals and selection of a best-in-class manager to deliver the asset class allocation, referred to as single sleeve access.
Single sleeve access can be beneficial given it enables precise alignment with an insurer’s SAA and overall risk/return objectives. It also allows insurers to focus on best-in-class managers for each asset class, and easier for risk teams to gain comfort. Therefore whether via a pooled fund or segregated mandate, single sleeve access can be the best route to market for insurers.
The other route to market, which is growing in interest, is employing a diversified private asset approach. This allows insurers to customise how they would like the private asset exposure to be delivered, constrained, and managed.
Benefits of diversified private credit
The breadth of private credit options is one of its most compelling characteristics. Insurers are not a homogeneous group of investors – their portfolios need to align with duration, seniority, credit quality and collateral preferences which will vary for each insurer. A diverse array of private credit strategies offers insurers flexibility to tailor their investments to mirror their liability profiles, improve asset-liability matching and optimise capital efficiency.
Two key issues for insurers when they are investing in private credit are: 1) fast deployment; and 2) obtaining value. Both issues are amplified when investing via single sleeve access – investors are at the mercy of the market conditions of this particular asset class at the time of investment which can lead to slow deployment or poor value (in pursuit of fast deployment).
We see multi-asset private debt portfolios as a solution to both issues. Portfolios that allow deployment across a range of private credit asset classes mean fund managers can invest in the best opportunities as they arise across the private debt spectrum. Asset class flexibility can give fund managers access to a wider pool of deals which allows them to be more disciplined on value selection, whilst still deploying at a fast pace. These portfolios still need to be carefully constrained to meet an insurer’s specific risk/capital requirements and requires good engagement with their risk teams, but they can be a very neat long-term solution to the key issues often faced by insurers.
“Deploying multiple private credit strategies allows insurers to balance risk and return preferences without concentration risk.”
A further advantage of multi-asset class private debt portfolios is diversification, both within the portfolio and the wider balance sheet. Portfolio diversification is achieved by combining asset classes exhibiting low or negative correlations with each other and private credit can demonstrate low correlations not only with traditional asset classes such as equities and public bonds, but also across the spectrum of individual private credit strategies.
Deploying multiple private credit strategies can allow insurers to balance risk and return preferences without concentration risk. Additionally, the choice of options can provide the ability to match exposure according to economic cycles: e.g. direct lending will be more stable during downturns, distressed credit should perform well during periods of market dislocation.
Risks and considerations
Private credit is not risk-free and not appropriate for every investor. Despite the potential benefits from investing in private credit, particularly adopting a diversified private credit approach, there remain important risks and operational challenges insurers need to recognise.
Avoidance of loss
In a market where covenant-lite structures and more aggressive deal terms have become more common, maintaining discipline is essential to avoid credit losses. Insurers must also guard against forced sales driven by liquidity needs, which can crystallize losses and undermine long-term returns. A focus on high-quality origination and conservative structuring is key to preserving capital.
Liquidity risk and liability matching
Certain Life insurance products face early surrender risk, and General Insurers face increased claims which can force asset sales at inopportune times. Unlike public markets, private credit usually lacks an active secondary market, making it difficult to exit positions quickly or at fair value.
Valuation uncertainty
With limited public disclosures and no standardised pricing benchmarks, investors must rely on internal models or third-party managers to estimate fair value. This introduces subjectivity and potential inconsistencies, especially during periods of market stress. For insurers, whose balance sheets are sensitive to valuation swings, this can have regulatory and capital implications.
Preparing for a credit downturn
An underappreciated risk is the lack of recent experience with a true credit downturn. The post-GFC era has been marked by benign credit conditions and ample liquidity. As macroeconomic uncertainty rises, how will private credit managers manage distressed situations? Do they have the expertise and infrastructure to work out problem credits?
Regulatory scrutiny and compliance
Finally, the regulatory environment is evolving. As private credit becomes a larger part of institutional portfolios, regulators are paying closer attention to valuation practices, liquidity risk, and systemic implications. Insurers must stay ahead of compliance requirements, ensuring their governance frameworks are fit for purpose in a more scrutinized and complex market.
Importance of manager selection
Selecting the right manager is not just about performance, it’s about alignment, transparency, and operational robustness. The complexity of managing bespoke credit portfolios, including documentation, servicing, and monitoring, adds another layer of risk. Insurers must invest in due diligence and ongoing oversight to ensure their managers are equipped to navigate a downturn.
Experience
Be wary choosing a manager based on short-term performance. The last 10-years have been a benign environment and not the best indicator of a manager’s ability: time in the market, not market timing matters. Demonstrable experience accumulated over 20+ years is required to evidence whether a manager can successfully invest across market cycles and disruptive financial events.
Process
A robust approach to credit analysis is essential: by way of illustration, within the M&G direct lending team, at first screen 70% of all opportunities are rejected, rising to a 95% rejection rate by the time credit analysis is concluded. With the rapid growth of private credit as an asset class, there are a lot of ‘new entrant’ managers and due diligence has never been more important.
Risk management
As with all fixed income, private credit is not risk free with an asymmetric relationship between risk and return. Avoidance of loss is therefore paramount and, where a stressed situation arises, in-house workout capability is vital. Has the manager a well-resourced workout team with a proven ability to renegotiate and restructure?
Pedigree
Private credit appeals to a spectrum of institutional investors, but their objectives, risk tolerance, challenges and regulatory environments are not the same. As an insurer, do you have confidence your manager understands the industry considerations that need to be taken into account? A manager that can reassure can become an invaluable investment partner.
Breadth of capabilities
Many managers can provide some, but not all, private credit strategies. Whilst bigger is not always better, synergies can be captured via teams managing different private credit capabilities collaborating and sharing insights across private credit teams. With a spread of private credit capabilities in-house, the manager can offer portfolio modelling and robust scenario analysis capabilities.
Conclusion
Private credit has established itself as a strategic asset class for insurers seeking enhanced returns, diversification and to better align assets with liabilities. The structural features of private credit can make it particularly well-suited to the long-term investment horizon and liability profiles for many insurers, in our view. With traditional fixed income facing yield compression, deteriorating credit quality and limited diversification, private credit may offer insurers a compelling alternative.
European insurers are increasingly allocating to private credit strategies, a trend which is only likely to accelerate given the Solvency II reforms and the Solvency UK matching adjustment expansions. We would argue taking a diversified approach to the asset class may provide the optimal solution. Success depends on manager selection with insurers ensuring they partner with experienced managers aware of the nuances of investment within the European insurance sector. In doing so they can unlock the full potential of private credit as a resilient and adaptive component of their investment strategy.
1 Source: Pitchbook, Preqin, January 2025
2 Source: Beinsure ‘European insurance companies set to Expand private credit allocations’, Moody’s Ratings Survey, June 2025
3 Source: Preqin, 2023
4 Source: M&G Investments, October 2025
5 Source: Pitchbook, LBO Interest Rate Coverage Ratios, June 2024
6 LCD ELLI and US LLI 5-year default rates as of April 2024
For Professional Investors only.
The distribution of this document does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and you should ensure you understand the risk profile of the products or services you plan to purchase. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer investment advice or make recommendations regarding investments. Opinions are subject to change without notice. This financial promotion is issued by M&G Luxembourg S.A. in the EU and M&G Investment Management Limited elsewhere (unless otherwise stated). The registered office of M&G Luxembourg S.A. is 16, boulevard Royal, L-2449, Luxembourg. M&G Investment Management Limited is registered in England and Wales under number 936683, registered office 10 Fenchurch Avenue, London EC3M 5AG. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority.
