What Has Happened to Insurer Investments in 2025

It's past the half-way point for 2025 and the environment for insurance companies remains uncertain. Insurers are keeping an eye on all aspects of the markets, from inflation, interest rates, domestic and international forces, etc. We spoke with SLC Management to review some of the key drivers impacting insurance company portfolios this year, as well as what signs to pay attention to as we approach the end of the year.

Thomas Klem | Managing Director, Head of Insurance Product Specialty | SLC Management
thomas.klem@slcmanagement.com | Learn More >>

Peter Cramer | Senior Managing Director, U.S. Insurance Asset Management | SLC Management
peter.cramer@SLCManagement.com | Learn More >>

SAA: How have the events of 2025 so far impacted the insurance investing space?

SLC Management: The insurance investing landscape in 2025 has been shaped by a volatile mix of macroeconomic and geopolitical forces. Persistent inflation, geopolitical instability and diverging interest rate expectations have created both stress and opportunity across fixed income markets. While 2024 saw record investment income for insurers, 2025 has introduced heightened credit risk and market dislocation, prompting a strategic re-evaluation of portfolio composition.

Insurance companies have responded by deepening allocations to private credit and structured products – commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralized loan obligations (CLOs). This has been done to trade liquidity for yield in a resilient but uncertain economy. The steepening of the yield curve has also challenged recent duration strategies, pushing insurers to reassess their asset–liability matching strategies.

Finally, regulatory scrutiny has intensified, especially around rated notes and asset backed investments. Insurers increasingly rely on these structures to gain capital efficient exposure to alternative asset classes. Despite these issues, the industry remains well positioned to capitalize on elevated reinvestment yields and emerging asset classes, provided risk is actively managed.

SAA: In a world of persistent inflation and rising geopolitical risk, how should insurance investors rethink their fixed income allocations?

SLC Management: Inflation has pressured insurance company financials by increasing claims costs, compressing underwriting margins and elevating operating expenses. In response, companies are relying more than ever on the income from their investment portfolios to help offset these effects. With reinvestment yields on bond purchases hovering around 4.5% (using the yield of the Bloomberg Aggregate Index as a proxy), the same portfolio allocation from five years ago produces significantly more income today.

While all-in yields may be attractive, spreads across most public fixed income sectors are at or near their all-time tights. Unsettlingly, this comes at a time when geopolitical risks and macro uncertainties are increasing almost daily. This leaves little room for error in the pricing of most risk assets.

Regardless, the low spread environment has accelerated the shift toward private credit and structured products, which offer higher spreads in addition to better structural protections and capital efficiency compared to public corporate bonds. These instruments may be particularly attractive for insurers seeking to optimize risk-based capital treatment while maintaining income generation.

SAA: How sustainable is the current divergence between short- and long-term interest rates, and what does it signal about market confidence in current governments?

SLC Management: The current divergence between short- and long-term interest rates – where short-term yields are pressured lower by softening economic data and dovish central bank signals, while long-term yields rise due to fiscal and political concerns – is both striking and fragile. It signals a market grappling with conflicting narratives: near-term economic softness versus long-term fiscal instability.

Short-term rates reflect expectations of rate cuts amid moderating inflation and cooling labor markets. However, long-term rates are being driven higher by surging Treasury issuance and growing skepticism around fiscal discipline. The U.S. government’s expanding deficit and speculation over political interference in monetary policy – such as the potential removal of U.S. Federal Reserve Chair Jerome Powell – have elevated term premiums and undermined confidence in the Fed’s independence.

Ultimately, we feel that this situation will persist for some time, and will only be resolved by meaningful improvements in the fiscal situation via improved tax receipts and/or spending cuts (or, in the short term, a meaningful economic slowdown).

SAA: What asset classes offer the most attractive risk–reward prospects currently? Which offer the least?

SLC Management: In our view, some of the best risk-reward prospects among core fixed income sectors are the structured sectors, namely asset-backed securities (ABS), RMBS and CMBS. We believe ABS spreads, while tighter, remain attractive relative to corporates and offer stable delinquency trends and improving recovery rates. CMBS continue to deliver yield premiums and structural protections, especially in tranches backed by diversified commercial real estate such as industrial warehouses and multifamily assets. RMBS also present potential value, particularly in seasoned pass-throughs and select collateralized mortgage obligations (CMOs).

Conversely, investment grade corporates offer a more challenging risk–reward profile, in our view. Spreads remain compressed, and the sector is vulnerable to macro volatility and fiscal uncertainty. While corporates still play a role in liquidity and benchmark alignment, their incremental yield is limited.

SAA: What signals will you pay the most attention to for the rest of 2025?

SLC Management: For the rest of 2025, we will be closely watching core inflation, especially services inflation. If it declines meaningfully, the Fed may accelerate rate cuts, boosting front end key rate duration (KRD) strategies. But if inflation proves sticky, policy could remain tight and the curve could bear-flatten.

Next, we are tracking labor market data, including state-level payrolls, wage growth and unemployment claims. A continued softening in the labor market would likely force the Fed into more drastic cuts than those already priced into the market (currently 2 cuts expected by year end, according to Bloomberg as of August 2025). They have already signaled a dovish shift, impacting both short-term yields and credit appetite, so any further weakness would exacerbate those trends.

On the long end of the curve, Treasury auction results and fiscal deficit changes will be critical. Elevated issuance without credible fiscal discipline will continue to steepen the yield curve, complicating the duration extension decision.

The information may include statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. All opinions and commentary are subject to change without notice. SLC Management is not affiliated with, nor endorsing, any third parties mentioned within this article.

Market insights are based on individual author opinions and market observations. SLC Management investment teams may hold different views and/or make different investment decisions. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services.

Investors should consult with their professional advisors before acting upon any information posted here.

Source: Strategic Asset Alliance, SLC Management. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of information cannot be guaranteed.