Insurers Flock into Private Debt, Alternatives, Mercer Says

Insurance asset managers overwhelmingly plan to invest in alternatives this year, increasing allocations to private debt and decreasing allocations to real estate equity, according to new research from Mercer and Marsh McLennan, published in the firms’ 2024 global insurance investment survey.

Mercer surveyed 84 respondents across 22 markets, 36% of which are life insurers and 64% non-life insurers. Thirty-six percent of respondents were from Europe, 20% from the United States, and 14% from Canada.

“As insurers strategically deploy excess capital in support of their portfolio objectives, our data shows that insurers intend to redeploy cash in public fixed income and private debt investments. Selecting skillful managers is essential for these asset classes, particularly later in the credit cycle. Investors should seize the moment to capitalize on opportunities while managing associated risks,” said Eryn Bacewich, principal and senior investment consultant of insurance investments at Mercer, in a statement.

Private Markets

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According to the survey, 39% of respondents say they plan to increase their allocations in the private markets this year. In total. 73% of respondents said they already invest in the private markets or plan to do so this year.

Among those that do not, illiquidity concerns and a lack of resources to assess investment opportunities were leading reasons to not make allocations to private markets.

Of those increasing their allocations to private market investments, the most popular asset allocations were investment-grade and sub-investment-grade private debt, with 27% and 23% of insurers respectively increasing allocations to these asset allocations in the past 12 months.

In the next 12 months, 32% of insurers surveyed expect to increase their allocations to investment-grade private debt and 21% to sub-investment grade. Only 1% of respondents said they plan to decrease these allocations in the next year.

The asset class that saw the largest decrease from insurers in the last 12 months was real estate equity, with 20% of insurers decreasing these allocations, although 17% of insurers surveyed said they would increase allocations to the asset class. Over the next 12 months, 15% of insurers say they will decrease their allocations to real estate equity, the highest decrease of all private market assets, 18% say they will increase this allocation.

Insurers’ appetite for private debt is driven by higher rates. “On the one hand, higher cash returns raise the bar for investing in private debt. On the other hand, private debt spreads continue to be meaningful, and all-in yields are typically well above those of high-yield bonds and leveraged loans,” said Denis Walsh, head of Insurance Australia at Mercer, in the report.

Barriers to Private Markets Investing

Of the 26% of insurers not making or planning to make investments in private markets, the biggest barrier was the inability to tolerate the level of illiquidity associated with private markets and alternative investments. Approximately 59% of insurers not making private investments say this was one reason they have not invested in these markets.

Another of the biggest challenges to insurers when making investments in the private markets was high fees, with 58% of respondents saying this was among their main challenges. According to the survey, 47% of insurers outsource their private market investments to external managers.

“Insurers rotating out of public fixed income into private debt are likely to have experienced a significant increase in costs. Private debt investments will mean higher fees, but insurers’ net-of-fees returns are likely to be higher, as are their returns on regulatory capital. We also anticipate the market for co-investments to continue to develop, which will provide larger insurers the opportunity to invest alongside a manager with no management fees,” said Chris Tschida, U.S. Head of Insurance at Mercer, in the report.