UK insurers backing pension risk transfer transactions are increasing their exposure to private credit, with opaque and difficult-to-value assets now accounting for more than 10% of the portfolios of several major providers, according to a report by the FT citing data from S&P Global Ratings.
The findings highlight the growing importance of private credit to the insurance sector, while also raising questions about transparency, valuation and liquidity as asset managers including Apollo, Blackstone and Brookfield expand their involvement in insurance and long-term capital.
S&P found that so-called Level 3 assets — investments that lack observable market prices and rarely trade — accounted for more than 10% of the portfolios of Legal & General, Standard Life and Brookfield-owned Just Group.
The insurers specialise in pension risk transfer transactions and are expected to take on as much as £500bn of UK pension liabilities over the next decade.
To match those long-term obligations, insurers have been increasing allocations to private loans and other illiquid assets that offer longer-duration investment opportunities.
The trend has accelerated as private capital firms have expanded into insurance through acquisitions and investment partnerships. Apollo, Blackstone and Brookfield have all increased their presence in the sector, with private credit strategies increasingly being used to finance companies that might previously have relied on banks.
The lending boom has extended to areas including AI software, data centres and middle-market companies, with a growing share of that debt ultimately finding its way into insurance portfolios.
However, S&P warned that market participants have limited visibility into the scale and composition of private credit exposure on UK life insurers’ balance sheets.
Insurers are not generally required to disclose detailed information on the location of borrowers, the sectors to which their lending is exposed or whether loans are held directly or through structured products.
S&P used Level 3 assets as a proxy for private credit exposure, excluding certain categories including infrastructure debt and some types of mortgages. The agency said the approach does not capture the full amount of private credit held by UK life insurers.
Pension Insurance Corporation, for example, is believed to have held a significant portion of its private credit exposure through Level 2 assets, which are valued using inputs that are not fully observable but are considered more readily measurable than Level 3 holdings.
S&P also conducted a stress test on a hypothetical UK life insurer with private credit exposure equivalent to approximately 12% of its portfolio. After assigning a range of investment-grade credit ratings to the loans, the insurer retained sufficient capital to withstand a shock comparable to the 2008 financial crisis.
The analysis nevertheless highlights the potential challenges insurers could face if they needed to sell large volumes of private assets during a period of market stress.
Insurers argue that private credit is increasingly important because it provides access to long-dated assets that can better match liabilities extending across several decades.
Legal & General last year agreed a partnership with Blackstone to expand its access to US private credit markets.
The growing integration of private credit managers and insurance balance sheets is likely to remain a key source of capital for private markets. But S&P’s findings also underline the need for greater transparency as insurers become increasingly important holders of loans that are difficult to price and trade.
