The New Insurance Playbook: Scale, Specialization and Smarter Capital

Geoff Cornell, CFA
Chief Investment Officer—Insurance

Insurer business models, growth opportunities and investments are evolving.

Insurance companies are entering a new phase of development defined by broader capabilities, deeper specialization and growing allocations to private assets. As we see it, their ability to navigate today’s changing market landscape is likely to hinge on disciplined risk management and the ability to build partnerships with asset managers who understand their individual needs and can help meet their unique objectives.

The forces that are reshaping the insurance industry are distinct but interconnected. In our view, most of these trends are likely to accelerate strategic balance sheet optimization among insurers. This may create synergies across distribution, asset management and services. For insurance companies who can adapt, we think the resulting specialization may become a key competitive advantage.

At the same time, insurance companies are becoming a critical source of long-term capital for private lenders. This is especially so for life insurers, whose long-term liabilities may support less liquid, higher-yielding assets such as private credit, commercial mortgages and asset-based finance—provided that they manage liquidity risk holistically.

For property-and-causality insurers who want to improve the quality of their earnings, shorter-duration private assets may be a good fit. We expect these developments to increase the insurance industry’s overall private-asset exposure, which will underscore the need for underwriting expertise.

The new insurance playbook, in many ways, is still being written. But we think five related themes will define the industry’s trajectory and inform how insurance companies go about building diversified and durable asset allocations.

The Search for Scale is Reshaping Insurance Strategy…

After the 2008 global financial crisis, insurers focused on strategically derisking their balance sheet to generate a larger capital buffer while balancing the need to earn sufficient risk-adjusted returns to deliver on promises to policyholders and shareholders. As a result, US life insurers last year transferred more than $100 billion of their liabilities to reinsurers, according to S&P Global.

A proposed merger between Equitable Holdings and Corebridge Financial could add a new page to the playbook: in addition to reinsurance transactions, companies are combining to build scale. If approved, the merger would create the largest life and retirement company by earnings and cash generation and one of the largest retirement, life insurance and asset management platforms in the US.

We don’t believe that mergers like these should be about size for its own sake. The strategic goal, in our view, is functional scale and the re-pooling of risk to achieve diversification. A bigger company may benefit from a wider range of products and distribution capabilities, which may boost capital efficiency and competitiveness while supporting growth. If insurers can leverage their size to achieve these goals, bigger may in some cases be better.

But Specialization Still Matters

Scale is valuable because it may strengthen an insurer’s position in businesses where size reinforces capabilities and expertise. But we don’t expect to see the return of insurance conglomerates as one-stop shops for a variety of products, from broad life insurance to property-and-casualty policies. There aren’t many technological and operational synergies between the two insurer types, and credit and equity investors are less likely, in our view, to favor conglomerates that merge the two.

Instead, we expect more insurers to embrace deeper specialization. The reason is simple: specialization has the potential to create durable advantages at a time when insurance industry economics, underwriting terms and the competitive landscape vary quite a bit by product and geography.

To put it another way, specialization may help explain where scale should be built. AI may be able to help insurers make these decisions. In our view, the objective should be to dig in where size reinforces expertise and existing advantages.

Put the Balance Sheet to Work

Every insurance company is different, but all of them have the ability to leverage their balance sheets strategically to create value. An insurer that owns a non-captive asset manager has the potential to generate steady revenues from the technologies and services it provides. This can offset the income volatility that results from claims and losses. Still, we think underwriting can remain profitable in certain markets or specialized areas where expertise, pricing discipline and barriers to entry may support stronger margins.

As we see it, an integrated model that blends insurance know-how with long-term capital may also provide balance. Asset management and fee-based businesses may create predictable earnings to offset the volatility that comes with underwriting. Insurers, meanwhile, offer large pools of long-duration capital that must be put to work. These complementary needs are likely to encourage more of these partnerships.

An Integrated Model: Expertise, Asset Management and Long-Term Capital

Life insurers face changing demographic trends, a volatile macroeconomic environment, and technological development. Property and Casualty insurers have their own share of challenges. We think embracing a more holistic approach to risk management across assets and liabilities in cooperation with trusted partners makes sense.

The most robust relationships, in our view, will depend on more than investments and fees. A manager who understands an insurer’s liabilities and regulatory capital constraints—and can structure investments accordingly—may offer a strategic advantage in a competitive market. In these areas, scale, distribution and investment capabilities often influence growth.

Private Assets: Portfolio Construction Matters

Private assets have become an established component of life insurance asset allocations, for compelling reasons. Private credit typically offers higher yields than public corporate debt, and because insurers have long-term liabilities, they’re well-positioned to take advantage of the illiquidity and complexity premiums these assets provide.

The risk in private assets has little to do with the “private” label, in our view. What matters is how assets are selected, sized and managed. For example, investment-grade private credit—a staple in many life insurers’ portfolios—may offer a risk profile that’s broadly similar to that of public investment-grade bonds but with less liquidity and stronger protective covenants. But transparency in reporting is also important when it comes to private assets. Insurers should be able to swiftly respond to questions and inquiries from regulators and investors.

What are the keys to success? In our view, disciplined underwriting, diversification and close alignment between assets and policyholder obligations are vital. And insurers should adhere to best practices in sizing risk and stress-testing liquidity needs under different economic scenarios as allocations to private assets grow.

As insurance business models evolve, we expect the strongest companies to combine greater scale with specialized expertise and disciplined capital allocation. Closer partnerships with asset managers should expand investment capabilities, but we think lasting success will require more than access to assets. For insurers navigating today’s investment landscape, disciplined risk management should remain a key priority.

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The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.