Key takeaways
A more challenging environment
In 2025, insurers may find it more difficult to produce 2024-type investment returns.
Fixed income positioning
While fundamentals are strong, we encourage caution on duration and spread duration.
Private market opportunities
We also see opportunities to continue building out private market portfolios, particularly in private credit and real assets categories.
As 2025 begins, Invesco believes this year will present insurers with a more challenging environment than 2024. Although the US election in November removed one major source of uncertainty, there remain a number of questions on investors’ minds looking forward. For example, will the Fed scale back on the easing cycle it’s embarked upon? Will tariffs bring about a new round of inflationary pressure? Will geopolitical conflicts bring risk assets under pressure? To be sure, inflation has come down significantly in recent years and global growth has held up reasonably well, but economic activity is decelerating (see charts below) as investors consider the various risks noted above. Against this backdrop, we believe insurers may find it more difficult to produce 2024-type investment returns.
Turning to current market conditions, we have clearly seen a meaningful shift higher in fixed income yields in recent years with the 10-year US Treasury yield rising another 50+ bps in 2024 alone. While major central banks have begun reducing policy rates, investors are already reassessing how far policy rates can fall and how quickly that destination can be reached. Notably, the US Treasury market is pricing in modestly higher long-term yields which are more meaningful to most insurers. Meanwhile, spreads have tightened in the past year, producing all-in yields for US and UK investment grade exposure in the mid-5% context and European yields in the mid-3% context. While fundamentals are strong, we encourage caution on duration and spread duration as yield and spread risks currently appear to be asymmetrically skewed to the upside.
Beyond public fixed income, we believe insurers should continue building out or refining their private market portfolios as well. Private credit remains an overweight position in Invesco strategies relative to other assets given attractive all-in yields, seniority in the capital structure, and reasonable spreads over liquid credit. Similarly, while commercial real estate (CRE) has been under pressure in recent years, the current environment offers attractive CRE debt yields – we believe this is an opportunity to enhance capital-adjusted returns.
Within private equity, we encourage caution. Substantial dry powder and high valuations make it a difficult environment from a technical standpoint, and with rates no longer hovering near zero, the return potential from deploying leverage is not as attractive as it was a few years ago.
We see a few opportunities within the real assets category; with commercial real estate potentially nearing a turning point, CRE equity represents a diversifying opportunity for insurers. For life insurers in the US, it may be even more compelling in light of the reduced capital charges implemented in recent years. We believe infrastructure will continue to be of keen interest to insurers as another source of diversification and steady cash flow generation, particularly outside the US; of note, some US municipal bonds can now be classified as infrastructure investments by European insurers, offering them a way to access their desired exposure in a more liquid format.
From a regulatory perspective, there are a number of items of interest in 2025. Global regulatory interest in reinsurance, particularly captive-related deals and those in offshore jurisdictions where transparency is more limited, will likely increase over time. Insurers will also need to adjust to new rules in the U.S. regarding asset-backed security (ABS) residual tranches, bond definitions and associated reporting, and likely changes to the capital charges methodology for CLOs.
In summary, we expect 2025 to be somewhat more challenging than 2024 for insurance investors. Investment opportunities certainly still exist, but with several sources of uncertainty as we begin the year, we believe a cautious approach is warranted heading into the new year.
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Investment Risk Warnings
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Data as of December 31, 2024, unless otherwise stated.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is being provided for informational purposes only, is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in any investment making decision. This should not be considered a recommendation to purchase any in-vestment product. As with all investments there are associated inherent risks. This does not constitute a recommendation of any investment strategy for a particular investor. Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. Please read all financial material carefully before investing. Past performance is not indicative of future results. The opinions expressed herein are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
