(Bloomberg) --The rise of private credit will continue to benefit US life insurers, whose growing investments in the asset class bolster returns, allowing for more aggressive pricing, according to Moody's Ratings.
Alternative asset managers, emboldened by the boom, will continue buying life insurers or seek more partnerships with them as they hunt for more capital to feed their dedicated funds, Moody's analysts wrote in a note Monday.
Life insurers that are owned by asset managers have easier access to their parents' origination capabilities, lifting investment returns, providing a competitive edge and fueling growth, according to analysts including Manoj Jethani, Scott Robinson and Marc Pinto.
"This yield enhancement can allow life insurers to offer more competitive pricing, for example through higher yields on annuity products," the analysts wrote.
Moody's, which expects the private credit market to almost double to $3 trillion by 2028, said the use of asset-origination platforms by life insurers stands to strengthen their credit profile — though it can increase investment risks for some of them.
Alternative asset managers, including Apollo Global Management Inc. and KKR & Co., have deployed tens of billions of dollars to acquire US life insurers in recent years. That has helped fuel the insurance industry's increased allocation of money to private investments, according to Moody's.
At end 2023, private equity-backed life insurers allocated 18% of their bond investments to collateralized loan obligations and asset-backed securities, while stand-alone insurers held just 11% in those strategies, the Moody's analysts wrote.
Those investment-grade products, whose illiquid nature is sparking concerns among regulators, have generated lower losses than public corporate securities since the 2008 financial crisis. Still, conditions have changed, making the need for a strong risk-management framework all the more essential.
"The market has not experienced a shock" on that scale since then, the analysts wrote. "Moreover, CLOs and ABS are a larger market now than in 2007-09, with higher aggregate balances exposed to future market downturns."
