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Tactical insurance allocations are transforming private markets, and there is compelling evidence to ?show real estate debt strategies will be substantial beneficiaries?
The wildfires in California, particularly the recent devastation in Los Angeles, underscore the growing challenges facing insurance markets amid rising risks. Reinsurers, which provide insurance to frontline insurance companies, in recent years pared back exposures to natural catastrophe risks, which accelerated the retreat of major insurance carriers in California leaving many homeowners without cover. Insured losses are expected to exceed the $12.5bn loss from 2018's Camp Fire, making them the largest insured wildfire loss in history and among the 10 costliest natural disasters globally, according to the Insurance Information Institute. This mounting strain highlights the urgent need for insurers to not only address immediate recovery efforts but also manage long-term liabilities effectively. The intersection of rising risks and the evolving role of insurers as key players in capital markets provides an opportunity to explore innovative solutions, such as real estate debt, which offers diversification, yield, and stability in turbulent times.
As life insurance and asset management increasingly converge, value creation is being driven by a synergistic “flywheel” approach, as described in McKinsey’s ‘Global Insurance Report 2025’. This model revolves around three interrelated components: scaling the issuance of insurance policies and annuities, deploying differentiated investment strategies, and managing capital efficiently. Achieving scale in annuity origination unlocks access to permanent capital, which is essential for long-term growth. This requires insurers to respond nimbly to changing market dynamics, quickly aligning annuity pricing with market opportunities to serve both individual and institutional clients.
Differentiated investment management, a cornerstone of this model, involves strategic decisions around risk appetite and asset allocation. Leading insurers are leveraging platforms to acquire real assets and issue loans directly to borrowers, capturing higher-yielding opportunities with calculated risk/return trade-offs. In the United States, nonbank entities now account for approximately 50% of commercial real estate lending, while European markets, such as France, Germany, and Italy, have seen allocations to alternative assets double over the past six years to 12%. These trends highlight the growing role of private credit, a $40tn market, in enhancing returns and supporting long-term liabilities. By building these capabilities, insurers are not only able to offer more competitive pricing to attract liabilities but also reaffirm their role as pivotal lenders in economies where banks are retreating from long-term financing.
According to the ‘2024 Global Insurance Investment Survey by Mercer and Oliver Wyman’, 73% of insurers currently invest in private markets or plan to do so within the next 12 months, up from 67% in 2023. Nearly 40% intend to increase their allocations to private markets in 2024. Among insurers already invested in alternatives, 60% are still working toward their target allocations, while only 7% have exceeded them. Survey responses of insurance allocations to real estate debt over the next year, found 12% increasing as opposed to only 6% of respondents decreasing exposure. Private debt funds are particularly popular, with almost one-third of insurers planning to increase allocations to investment-grade private credit and 21% intending to expand their exposure to sub-investment-grade credit. Similarly, 20% plan to increase allocations to private equity. These statistics underline the growing importance of private markets in insurance portfolios as insurers seek alternative investments to align with their long-term liabilities.
The regulatory landscape significantly influences how insurers structure their investments, particularly within the realm of private debt. To meet Solvency II requirements, insurers must carefully evaluate the characteristics of their portfolio's building blocks. Contrary to the assumption that private debt mirrors the flexibility of public debt across attributes like duration, coupon type, and rating, according to M&G’s ‘Diversified Private Debt Portfolios for Insurers’, the reality is far more nuanced. Private debt spans a diverse range of opportunities, including corporate lending, real assets, consumer finance, and private securitisations. Each asset class offers unique advantages, such as enhanced returns and capital efficiency, with some structures offering a lower solvency capital requirement (SCR). This flexibility enables insurers to optimise their portfolios by blending asset classes to meet specific regulatory and financial objectives.
Given the constraints on insurers to deploy capital efficiently, private debt offers a scalable and attractive solution. Recent industry consensus estimates that approximately 10% of insurer portfolios will be allocated to private markets within the next five years, reflecting an increasing emphasis on bespoke investment strategies tailored to insurers' long-term liabilities and regulatory needs. Such approaches not only enhance return profiles but also position insurers to leverage market opportunities dynamically while satisfying stringent regulatory requirements.
Real estate debt has become an essential component of insurers’ portfolios, offering stable, long-term cash flows and significant capital efficiency. According to Schroders report, ‘Credit Where It’s Due – Finding Value and Fit for UK Insurers’, some insurers now allocate over 10% of their balance sheets to real estate debt across diverse borrower types and financing stages. Regulatory frameworks like Solvency II provide further support, with senior and investment-grade real estate debt benefiting from reduced solvency capital requirements (SCR). These assets, typically backed by collateral with moderate loan-to-value (LTV) ratios below 75%, can halve SCR charges compared to similar corporate bonds.
The retreat of banks from traditional lending markets, driven by Basel III requirements, has opened opportunities for insurers to fill the gap. KKR identifies this pullback as a long-term structural shift rather than a temporary adjustment. Should banks reduce their share of commercial real estate lending to 30%, this would create a financing gap of roughly $300bn. Real estate credit funds and the CMBS market are expected to step up, while insurers’ ability to align long-term liabilities with real estate debt income streams positions them as critical players in maintaining market stability.
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According to Invesco, ‘Real Estate: A Source of Diversification for Insurers’, real estate debt combines yield, diversification, and favourable capital requirements, making it an attractive alternative to public bonds in the current low-yield environment. Senior real estate debt provides higher returns compared to corporate bonds of similar ratings, while enhancing portfolio diversification through unique property-level value drivers and loan-specific risk profiles. Insurers can capitalise on these benefits within internal models or through the Own Risk and Solvency Assessment (ORSA) framework.
Senior real estate debt typically features conservative loan-to-value (LTV) ratios below 60%, offering a significant equity cushion compared to the 40% average for corporate bonds. Secured against underlying properties, these loans often achieve higher recovery rates than corporate bonds’ typical 40%. As the most common private debt investment among insurers, real estate debt is poised for further growth.
Under Solvency II, real estate debt benefits from favourable capital treatment despite being “not rated.” While carrying a slightly higher spread capital charge than BBB-rated loans, these medium-duration assets (about five years) achieve significant capital efficiency through collateralisation. Further reductions in capital charges can be achieved by adhering to qualifying collateral rules. With these advantages, real estate debt offers insurers a scalable, efficient solution for meeting long-term obligations and optimising portfolios.
The transformative role of insurers in real estate debt markets is exemplified by key players like Brookfield Reinsurance and AAM Insurance Investment Management. Brookfield, who recently completed its acquisition of American Equity Investment Life Holding, is doubling its insurance assets to $100bn and consolidating its credit activities to drive growth. “What we’ve decided to do is bring all of our credit activities under one umbrella, allowing for increased focus and more growth,” Brookfield Asset Management chief executive Craig Noble told Bloomberg.?With private credit and direct lending accounting for 80% of its fee revenue, Brookfield expects its credit business to triple over the next five years, aligning with its broader ambition to grow fee-bearing assets from $457bn in 2023 to $1tn by 2028. The company’s focus on integrating insurance and credit platforms reflects its ambition to scale and drive profitability.
Similarly, AAM’s partnership with Affinius Capital highlights the importance of collaboration in enhancing insurance investment strategies. By combining expertise in insurance needs with real estate lending, the partnership delivers innovative commercial real estate strategies tailored to insurers' unique objectives. John Schaefer, CEO of AAM, highlighted the importance of this collaboration, stating, “AAM’s primary focus has always been to partner with insurance companies, understanding their objectives and constraints, and to provide accretive investment strategies.”?
As was the subject of a previous Weekly Note Apollo's merger with Athene Holding expanded its access to low-cost capital through insurance liabilities, which Rowan described as "turbocharging" Apollo’s growth into investment-grade private credit. This shift has allowed Apollo to diversify its portfolio, strengthen its risk-adjusted return profile, and dominate in a market that increasingly demands scale, judgement, and expertise.
The growing convergence of risk, regulation, and market opportunity underscores the critical role of insurers in shaping the future of real estate debt markets. By leveraging real estate debt’s yield enhancement, diversification, and capital efficiency; insurers are not only meeting regulatory and liability-matching challenges but are also emerging as pivotal players in bridging financing gaps left by banks. As the financial landscape evolves, the ability of insurers to innovate, scale, and integrate asset management with private credit strategies will determine their success in navigating an increasingly complex and competitive market.?
Some years ago a couple was on vacation and a burglar entered their home in Pennsylvania, USA. After the robbery, he tried to exit through the garage, which malfunctioned and would not open. He was stuck in the garage for a little over a week and ended up eating the only thing he could find – a bag of dog food and one case of Pepsi. He ended up suing their homeowner’s insurance and won the case claiming undue mental stress. He walked away with $500,000. Insurance policies might not always be sensible, but there’s little doubt there’s much better ways of deploying insurance capital, and real estate debt is a good option.
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