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How can insurers position credit portfolios amid higher risk and uncertainty?
8 min read 25 Sep 25
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Insurers face a challenging credit landscape, with spreads near historic tights and limited dispersion. As uncertainty persists, strategies focused on credit quality, liquidity, and spread duration are gaining traction. Evolving regulations and underutilised asset classes, like high-quality structured credit, offer new opportunities to strengthen portfolios and enhance long-term resilience.
Credit remains central to insurers’ portfolios, but navigating today’s environment requires a more agile approach. With spreads tightening and macroeconomic uncertainty persisting, insurers are reassessing how to safeguard balance sheets while sustaining yield. Market conditions are prompting a closer look at public spreads, portfolio positioning, and the practical use of key asset classes.
Spreads are tight versus historical levels
Credit spreads have remained at the tighter end of the 10-year range since the start of the year, despite some spread widening following President Trump’s announcement of import duties on “Liberation Day” in April. Additionally, spread dispersion within notching buckets remain tightly clustered together, thus limiting the opportunities to select winners within each bucket.
This market environment proves challenging for large credit investors, such as insurers, who need to generate yield but are cautious of taking on risk that they don’t feel adequately compensated for.
What can insurers do to manage their credit portfolios in this market?
We see three key strategies insurers can take in their credit portfolios in the current market:
- Firstly, prioritise credit quality to limit the impact from spread widening.
- Secondly, keep some powder dry to take advantage of credit markets when spreads widen.
- Thirdly, actively manage spread duration (whilst maintaining overall duration through derivatives if necessary).
Whilst these strategies may sound simple, insurers can face difficulties in the implementation of an approach change. We dive into each one below.
1. Prioritising credit quality
Given the risks and volatility across macroeconomic factors, focusing portfolios on higher quality assets can give insurers greater protection if a sharp spread widening event occurs.
Although finding the right risk/return balance has always been important for insurers, we think improving credit quality makes sense right now given historically tight credit spreads. Yes, highly rated credit assets provide a lower return, however spreads are tight across the credit rating spectrum, not just at the higher end. Therefore, the yield sacrifice for prioritising credit quality today is not extreme, yet doing so could prove pivotal in an insurer’s long-term investment portfolio performance.
2. Keeping powder dry
Secondly, we believe insurers should keep a healthy amount of dry powder available in order to be able to react swiftly when market conditions do shift. Whilst insurers tend to always hold a certain level of cash to meet claims obligations, this is usually only a limited amount given its low yield and drag on portfolio performance. Therefore, having some additional dry powder available for redeployment into credit markets could prove very useful if markets move sharply and insurers should ensure that liquidity earmarked for opportunistic deployment is genuinely accessible.
Increasing dry powder will lower portfolio yield. However, given how tight credit spreads are currently trading at, the yield reduction from increasing cash holdings is relatively limited, making this a more viable option. Therefore, we think a modest increase in an insurer’s dry powder to allow them to react quickly in a credit spread widening event has merit.
3. Managing credit spread duration
Lastly, managing credit spread duration effectively can add significant value to credit portfolios over multi-year cycles. By this, we mean having the ability to reduce spread duration when spreads are tight, to protect against spread widening, and selectively increasing spread duration when credit spreads widen, to capture the additional returns available in the market.
This approach to spread duration management has a proven track record of outperformance over a credit cycle. However, carrying out the process effectively requires a fast and dynamic investment approach. Such an approach can be challenging for insurance companies to execute in-house given the layers of governance and committee sign-offs involved when looking to significantly alter part of the investment portfolio. Therefore, outsourcing such strategies to active, external managers and giving these managers the flexibility to react quickly when credit markets move could generally be a more effective and beneficial approach to take.
“Although insurers are generally very familiar with public credit markets, so could technically try to implement this in-house, active fixed-income managers with a long track-record tend to be set-up better for such strategies”
Practical Approaches to Implementation
At the intersection of these strategies, we see value in particular asset classes. These include high quality credit and government bonds, which insurers are already well allocated to, as well as cash and money market funds, also well utilised by insurers currently.
Unconstrainted, active fixed-income management is a strategy that we see as under-utilised by insurers currently. Insurers’ core credit portfolios tend to be quite rigid in their investment guidelines1, however, allowing much greater flexibility in their surplus portfolio can allow them to capture significant additional spread over a credit cycle.
Although insurers are generally very familiar with public credit markets, so could technically try to implement this in-house, active fixed-income managers with a long track-record tend to be set-up better for such strategies. M&G’s Total Return Credit strategy is an example of how managers can perform in credit markets when given much greater investment flexibility. Whilst the fund is required to have an investment grade average rating as a minimum, having the ability to dynamically adjust the fund as credit markets evolve has led to a 15-year plus track record of high yield returns with investment grade volatility.
Finally, high quality structured credit is an asset class that straddles all three strategies and is under-allocated to by European insurers.
Securitisations are heavily penalised under the current Solvency II regulations meaning European insurers have tended to avoid the asset class, despite many attractive qualities. This is highlighted by the difference with US insurers who have c.15%3 of their portfolios invested in structured credit, compared to only 2% in Europe2.
The draft regulations published for consultation by the European Commission in July 20254 suggest that a reduction in the capital charges for all securitisations (senior or non-senior) is likely to come into force in the near future. However, we see high quality securitisations as particularly favourable to insurers in the current market environment. These instruments are extremely resilient to credit events, provide high liquidity (even in times of stress) and have low spread duration. They also offer a premium versus equivalent rated corporate bonds meaning the yield sacrifice for prioritising credit quality is less significant.
In particular, insurers should focus on Simple Transparent Standardised (STS) securitisations given the reduced capital charges (in the current regulations and under the proposed draft regulations). This growing part of the market offers an attractive return on capital and could be a key asset class for insurers portfolios, as previously outlined.
Investing in credit markets can appear challenging when spreads are near historic tights and there is little dispersion in the market. However, we believe insurers are able to remain resilient and position balance sheets for long-term performance by focusing on three key strategies: prioritising credit quality; keeping powder dry where possible; and dynamic spread duration management. Executing these strategies effectively whilst making the most out of the asset classes available in each bucket, will potentially help insurers navigate current credit markets and could lead to greater long-term performance.
1M&G Investments ‘The lost art of credit analysis in buy and maintain management’, (mandg.com), May 2024.
2NAIC, ‘Capital markets special report’, (naic.org), May 2025.
3EIOPA, ‘Insurance statistics’, (eiopa.europa.eu), data obtained September 2025.
4European Commission, ‘Insurance and reinsurance firms – review of technical rules’, (ec.europa.eu), September 2025.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
