Resiliency of private credit in insurance portfolios

Due to multiple forces such as the historical low yield environment, reductions in traditional bank lending, and competitive industry pressures, we see insurers increasing their allocations to private market assets such as Private Credit. Using historical rating transition matrices from Moody’s and S&P, we examine the resiliency of private debt assets linked to infrastructure relative to debt linked to corporate entities. We show that High Yield (HY) Infrastructure may provide resiliency and diversification to insurance portfolios relative to corporate-linked debt such as Public HY and Middle Market Lending by estimating the impact of the negative credit experience on both an insurer’s Risk-Based Capital (RBC) ratio and the investments’ holding period capital and default-adjusted yield. 

The primary metric used to define resiliency in our analysis is “Lifetime Capital Consumption,” which in addition to an investment’s initial required capital also accounts for the incremental capital insurers would need to hold due to ratings downgrades and cumulative credit losses over the investment’s holding period. Our estimate of the “Lifetime Capital Consumption” is the primary input used in to estimate an illustrative RBC ratio decline, and capital/default-adjusted net yield across BBB Credit, Public HY, Middle Market Lending, and HY Infrastructure Debt.

Our analysis has three primary takeaways (1) HY Privates have offered enhanced yield and resiliency over BBB Credit and Public HY allocations, (2) within HY Privates, Infrastructure Debt may offer additional resiliency without sacrificing yield relative to Middle Market Lending, and (3) credit losses were a more meaningful contributor to negative credit experience in HY allocations, while in Investment Grade (IG) allocations, rating downgrades were more meaningful, which we show by examining the RBC ratio impact of an allocation to each asset class.