Private placement securities continue to be attractive to insurers

Private placement securities continue to offer insurers attractive opportunities to enhance portfolio income, according to a recent Conning report.

Conning’s latest Viewpoint commentary, “Private Placements: Aiming for Greater Yields, Downside Protection and Customized Cash Flows,” describes how private placement securities offer insurance companies opportunities for enhanced portfolio income with higher yields and stronger protections compared to public securities. These investment-grade securities provide flexibility in maturities and customized cash flows to better align with insurers’ liabilities, although liquidity considerations are important.

The Conning report said larger insurers often maintain significant exposure to private placements and have developed effective liquidity management strategies. Small- to mid-sized insurers, meanwhile, can benefit from working with experienced investment managers who understand liquidity requirements and have access to meaningful deal flow.

Benefits of private placement

The broad range of maturities available in private placements —often wider than what is offered in public debt markets – are another potential benefit as this flexibility allows insurers to better align maturities with liabilities. In addition, private placements can support portfolio diversification by providing exposure to both U.S. and non-domestic issuers that are generally absent from the U.S. public debt markets, Conning said.

The vast majority of private placement issuance is investment grade and tends to come from traditional groups such as industrials, financials and utilities, making the asset class more suitable to many insurers, the report said.

Issuers may turn to the private market for a variety of reasons, including a desire to avoid Securities and Exchange Commission registration. Marketing SEC-registered securities can slow an issuer’s time to market. Issuers may also prefer to keep details of their business private rather than release information as required in SEC registration.

A common misperception of private placements is that they mainly feature long maturities and they are assets better suited to the needs of life insurance companies than those with shorter-dated liabilities, Conning said.

However, the private placement market is very active in a wide variety of maturities, including shorter maturities. The range of available maturities is from 3 to 30 years in both bullets and amortizing structures. Insurers can often find specific maturities to match their unique liability needs (e.g., an eight-year maturity issuance for an eight-year liability).

Insurers with $20 billion or more in assets had slightly more than 25% of their total bond allocation in private placement securities as of year-end 2024, while insurers with between $10 billion and $20 billion had more than 20%.

While larger insurers may have the necessary resources and liquidity appetite to successfully invest in private placements directly, smaller insurers may find the help they need by working with an experienced asset manager.

Enhanced yield and portfolio income is driving trend

Jonathan Stanley is a director and portfolio manager at Conning and one of the authors of the report. He told InsuranceNewsNet that interest in private placement securities is largely driven by “the enhanced yield and portfolio income that you get from the asset class.

”I think generally all accounts, not just insurers, are looking at alternatives to the public space. So we've seen a lot of growth in private credit, and we’ve seen a lot of growth in private placements and other alternatives that are out there. Insurers, like most investors, are trying to not give up credit quality, but look to enhance yield and portfolio income.”

Stanley said he predicts the use of private placement securities by insurers will continue to grow.

“We've seen $92 billion in issuance through the end of October, compared with last year, which was a record year of $96 billion. So we will easily surpass that for this year. It’s that king of supply and demand equilibrium. As there is more demand for this, there will be supply to meet that demand.”

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].