US Insurers: Navigating a New World of Risk and Opportunity

Introduction

Attractive yields have returned, but the decisions facing insurance investors have become more complicated. The tension between those risks and opportunities was at the heart of a breakfast discussion on 7th October 2026, the cio investment club’s inaugural breakfast event in the United States.

Held under the Chatham House Rule, the meeting allowed participants to speak freely without their comments being attributed. The conversation covered interest rates, the changing economics of private credit, liquidity, artificial intelligence and the possibility that financial markets are underestimating the risks ahead.

Interest rates and the limits of forecasting

A central question was how to position portfolios when the outlook for interest rates remains difficult to predict. Higher government borrowing requirements, substantial Treasury issuance, uncertain monetary policy and changing inflation expectations have contributed to volatility in bond markets.

One participant suggested that developed-market government bonds had begun to behave more like emerging-market debt, with new issuance sometimes putting upward pressure on yields.

For insurers, interest-rate movements influence liability valuations and portfolio duration decisions. A recurring argument was that insurers should resist making large directional bets on where rates will go next and that investment managers may be better served by concentrating on risks they can control.

For the CIOs in the room, asset-liability management was an overarching influence, with investment strategies built primarily around insurer liabilities. Life insurance companies represented had longer-dated obligations requiring predictable cash flows over many years. Property and casualty insurers face different claims-payment patterns and place greater emphasis on shorter-duration investments and liquidity.

Some life-sector participants described managing interest-rate exposure at the level of individual transactions, including through derivatives, rather than across the overall portfolio.

Others discussed using interest-rate swaps to separate decisions about duration from those about credit exposure. The argument was that this can allow an insurer to maintain the interest-rate characteristics needed to support its underwriting liabilities while pursuing credit opportunities elsewhere.

Underlying the debate about interest rates was concern about government finances. Persistent fiscal deficits and the volume of debt governments must issue to finance them have become increasingly important considerations for fixed-income investors.

Participants questioned whether today’s markets accurately reflected the long-term consequences of large borrowing requirements. They pointed out that ever-increasing supply is likely to prompt investors to demand higher yields.

The conversation highlighted challenges for insurers holding long-duration assets, particularly if rising yields produce significant mark-to-market losses. On the flipside, deterioration in economic conditions could prompt investors to seek government bonds and expectations for monetary easing to increase.

Private credit demands greater selectivity

Private credit occupied a substantial part of the conversation, reflecting its growing importance to insurance investment portfolios. This diverse asset category has benefited from demand for higher yields and cashflows that can be matched against long-term liabilities.

Participants described a market in which capital is no longer as readily available to every borrower or investment manager. Pressure on some business development companies, concerns about the software sector and greater scrutiny of private-market valuations have created opportunities for investors able to deploy capital selectively. In some areas, participants reported spreads widening by approximately 25 to 50 basis points.

One participant saw opportunities for insurers with patient capital to negotiate better pricing, stronger covenants and more favourable terms.

One debate concerned sponsor-backed lending, where borrowers are owned by private-equity firms, compared with lending to companies without private-equity sponsors.

Supporters of sponsor-backed transactions pointed to experienced owners, established governance arrangements, financial reporting and the resources sponsors can bring to struggling businesses. 

Others argued that non-sponsored lending can offer better economics. Participants cited potential yield premiums of 200 to 300 basis points in some parts of that market, alongside stronger lender protections and more direct relationships with company management. 

Factors determining the attractiveness of a transaction included borrower quality, the lender’s negotiating position, the loan structure and the price paid for risk, participants said. 

Size was also seen as important. Large transactions attract more lenders and competition, potentially weakening terms. Smaller transactions may offer higher returns but require more intensive underwriting and monitoring.

Participants also questioned whether a large, highly diversified portfolio necessarily offers better protection than a smaller portfolio assembled through selective underwriting. Diversification reduces exposure to individual borrowers, but cannot compensate for weak credit standards across a portfolio. Equally, concentration demands considerable confidence in the manager's ability to assess businesses and manage deteriorating credits.

The conversation also explored the structures through which insurers gain private credit exposure. Rated note funds have attracted interest because they provide access to private investment strategies through instruments designed to fit insurers’ regulatory capital requirements.

One participant noted that rather than investing directly in an unrated private credit fund, an insurer may purchase a rated debt instrument, issued by a structure holding interests in the underlying assets. The rating and capital treatment can make the investment more attractive, but establishing these structures is neither simple nor inexpensive.

Obtaining ratings, securing initial investor commitments and arranging financing create practical challenges. Questions arose about whether investors in a fund should receive exposure to different pools of assets.

Another development is the use of insurance guarantees, or wrappers, to support ratings. These can improve the apparent credit quality of an investment but introduce sometime significant costs.

Participants discussed guarantee fees of approximately 130 to 200 basis points, potentially consuming much of the additional yield that made an investment attractive.

There is also counterparty risk. If a structure depends on the rating of the insurer providing the guarantee, a downgrade could affect the investment even if its underlying loans continue performing.

Leverage raised similar questions. Participants argued that the amount of borrowing tells only part of the story, while the terms governing that borrowing are also important. Financing arrangements permitting frequent collateral revaluations, margin calls or forced asset sales may be more vulnerable during market stress than arrangements with stable, longer-term funding.

Public markets regain appeal

The group also acknowledged that higher yields have changed the relative attraction of public and private investments. During the prolonged period of low rates, insurers had a strong incentive to move beyond traditional bonds in search of returns. That incentive has now weakened.

Participants discussed the usefulness of liquid instruments, including bond exchange-traded funds, in insurance portfolios. ETFs provide efficient access to diversified exposures and allow investors to adjust positions more quickly than many private-market strategies. Changes in regulatory capital treatment have also contributed to their appeal in some circumstances.

However, ETFs introduce their own considerations. Valuation changes are immediately visible and their liquidity also depends partly on the markets for their underlying securities. An ETF may be easy to trade without every underlying bond being readily saleable at a stable price during market stress.

Participants said private investments may appear less volatile, because valuations are updated less frequently. That does not necessarily mean their economic value is more stable.

Higher public-market yields may make resilient portfolios easier to construct without unnecessary complexity. Nevertheless, private markets remain attractive where investors have suitable liabilities, sufficient expertise and the ability to hold assets through difficult periods.

Liquidity is a strategic advantage

Private assets have traditionally offered an illiquidity premium. But with attractive yields available in public fixed-income markets, participants questioned whether compensation for surrendering liquidity is always sufficient.

Some noted that returns of about 6% to 7% were available in comparatively conservative investments, reducing the need for more complicated or illiquid assets.

An insurer may expect to hold assets for years, but unexpected cash demands can arise from claims or policyholder withdrawals. Life insurers must also consider policyholders surrendering products more quickly than anticipated, particularly at times when interest rates are higher.

Liquidity needs must be considered against the timing and uncertainty of liabilities, participants agreed. The group discussed Federal Home Loan Bank facilities as an additional source of liquidity for eligible US insurers. While this can provide flexibility, it does not eliminate the need for prudent planning.

Concerns extended to evergreen private credit funds, which allow periodic subscriptions and redemption requests. Such structures may appear more liquid than traditional closed-end funds, although the underlying loans remain difficult to sell quickly. If redemption requests accelerate, the mismatch between investor expectations and asset liquidity can become a source of pressure.

An added advantage for an insurer with available cash and liquid assets is being better positioned to take advantage of opportunities when others are forced to sell.

AI’s broad impact

Artificial intelligence was a constant thread through the discussion, not simply because of its potential to transform investment operations, but because of its implications for the businesses that insurers finance. Participants were concerned about how quickly AI could undermine established business models. 

Software companies were a prominent example. Many had generated recurring subscription revenue, high customer retention and strong margins over time, making them attractive private credit borrowers.

But new AI tools capable of rivalling specialised software could challenge the durability of those revenues. This creates a difficult problem for lenders underwriting loans maturing several years into the future.

Participants noted that a business that appears financially secure today may face a very different competitive environment before its debt matures. The question is not just whether AI improves productivity, but who captures the benefits and which businesses lose customers or pricing power. 

When it comes to AI’s potential effects on employment and the wider economy, some questioned whether the technology could contribute to a deflationary shock by replacing jobs and reducing labour costs.

Others cautioned against attributing current employment weakness entirely to AI, noting that hiring and layoffs have multiple causes. Also, the timing and scale of disruption remain uncertain. Adoption may take longer than many expect, particularly where implementation is complex or heavily regulated. However, even a slower transition could substantially alter individual borrowers' creditworthiness.

And the discussion also touched on a second risk: that AI fails to deliver on its potential, making vulnerable the huge investment and elevated valuations built around expectations of success.

Therefore, participants felt that either extraordinary success or failure of AI would create challenges for investors.

Alongside these concerns, participants described practical ways AI is changing their work. Applications included summarising documents, preparing for manager meetings, comparing proposals, analysing data and building financial models. Tasks that previously required hours of manual review can sometimes be completed in minutes.

One participant described substantially reducing staffing requirements for certain analytical functions after introducing AI tools. Others discussed using the technology to support asset allocation, test portfolio scenarios and monitor investment managers.

But the technology’s limitations were also mentioned. For example, AI systems can misread financial presentations, extract incorrect figures or produce inaccurate answers with apparent confidence. The cost of sophisticated AI tools was another concern, with usage-based pricing making expenses difficult to predict.

Data security also matters. Financial institutions must decide whether confidential information can safely be processed through external services, prompting interest in closed systems.

Despite enthusiasm for automation, participants were reluctant to suggest AI could replace human judgement. Manager due diligence was one example of where they said it could not.

Technology can analyse performance histories and processes, but is less capable of assessing management quality through direct interaction, particularly when evaluating characteristics like integrity and judgement.

Are markets underestimating the dangers?

Towards the meeting’s conclusion, participants were asked to identify the most underappreciated risk over the coming year. Their answers differed, but several shared a concern that financial markets appeared remarkably calm despite substantial uncertainty.

The group pointed to geopolitical instability, fiscal pressures, monetary policy uncertainty and potential AI disruption. Yet, they noted, corporate credit spreads remained tight and equity markets were trading near elevated levels.

That combination prompted questions about whether investors were adequately compensated for risk. Some worried that markets had become accustomed to absorbing shocks without lasting damage, encouraging complacency.

Others suggested the greatest threat might come from an event not yet attracting widespread attention. AI featured again, both as a source of potential economic disruption and an area where expectations could prove excessive.

Geopolitical developments were another concern, particularly because their effects can spread through energy markets, inflation, supply chains and financial conditions.

There was also unease that underwriting practices might not be keeping pace with change. If lenders assess businesses using assumptions developed for a more stable environment, they may underestimate the risks they are taking on.

However, the participants conceded that insurance investors cannot simply withdraw from markets whenever risks appear elevated. They have obligations to policyholders and new premiums to invest. 

One of the main takeaways from the discussion was that while insurers cannot avoid investment risk, they can be more deliberate about which risks they accept and how much they are paid to take them.