After an eventful start to 2025, we revisit our themes for the year and where we stand today.
Whether it was a trade war erupting, an equity market round trip or whipsawing interest rates, there’s been plenty for insurance investors to react to so far in 2025. Let’s recap the macro and market picture, check in on the industry, and see how our themes have developed over the first half of the year.
Tariff Tempest Causes Macro and Market Upheaval
It wasn’t the ebb and flow of hard data on the state of the economy or fundamentals that upended investment plans—it was a major policy shock. The Trump administration’s April announcement of sweeping tariffs caused a major reassessment of the path forward.
Markets reeled as concern about a recession intensified, with both consumers and businesses squeezed by higher costs and falling demand. Credit spreads on investment-grade and high-yield corporate bonds climbed as high as 119 and 453 basis points, respectively. Securitized markets held up somewhat better, while private markets took a “wait and see” approach.
Fragmented Growth and Situations Within Insurance Industry
For North America’s insurance market, growth is still fragmented. Life insurance saw its very modest growth from last year continue. Annuity sales were over $100 billion in 2025’s first quarter but down by 1% versus the same period in 2024: registered index-linked annuities and traditional variable annuities climbed by 21% and 14%, respectively, but fixed annuities fell back by mid to high single-digit percentages. Pension-risk-transfer activity has been robust so far, based on both the number of projects and insurers bidding.
Life insurers with spread-lending capabilities continued optimizing their funding sources, tapping the Federal Home Loan Bank’s system (insurers’ advances rose to over $165 billion) and funding agreement-backed notes (issuance is up 20% year to date versus the same period in 2024).
In Property and Casualty, underwriting results and premium growth have remained robust, but offset by large losses from those exposed to the California wildfires. Higher catastrophe-related claims have made liquidity a need for some insurers; others have benefited from higher premiums driven by rising property values and higher investment returns. Strategies seem to be shifting from capital gains to a more balanced mix of income (book yield) and total return, while balancing equity gains with fixed-income losses.
Reinsurance volumes continue to pick up in 2025, with Bermuda still the preferred offshore choice. Industry outlooks continue to point to strong growth in global insurance volumes, particularly in Asia-Pacific. Reinsurance sidecar launches and new fundraising are up, as asset managers, insurers and other interested parties seek more ways to tap into the insurance sector’s value.
Checking in on Our 2025 Insurance Themes
There have been “just a few” developments since we laid out our 2025 themes. In the second half, tariffs’ impact will likely flow into hard economic data, with economic growth slowing. We’re paying extra attention to key risk areas in insurance investing: default risk, ratings migration, convexity and liquidity.
Our themes still hold, though the global macro backdrop seems slightly more negative.
Keep Duration Near Target; Be Nimble on Fixed vs. Floating
We expect rates to stay unsettled as the full weight of tariffs comes to bear, with a wide range of possible outcomes. This reaffirms our view of keeping duration closer to home and being thoughtful with yield-curve exposures, minimizing mismatches with liability duration where possible. Insurers should also be mindful about floating versus fixed exposure.
Expectations for Fed rate reductions have been pushed back, though cuts will likely come eventually—and inflation could pick back up when they do. Long-term rates won’t necessarily move in lockstep with falling short-term rates, so the yield curve might steepen, bringing considerations about reinvestment risk into play. Whether insurers focus on yield or spreads, assessing risk compensation will be critical.
Emphasize Quality and Diversification—and Manage Tariff Impacts
Trade tensions are a new factor and have likely boosted the probability of a US recession. That could eventually weigh on credit fundamentals and trigger ratings agency downgrades, crimping regulatory capital budgets. To gauge the potential tariff impact, Insurers may seek to assess total portfolio exposure to select geographies, sectors and issuers under different scenarios.
A greater probability of slowing economic growth calls for balancing the need to diversify with avoiding credit downgrades; the emphasis should be on selectivity and disciplined credit assessments. Fundamental tools can help identify potential weak spots, and watch-list screens bear close monitoring. Credit spreads could still widen, and insurance investors should prepare for liquidity raises and inflows.
Express Relative-Value Views through Marginal Allocation Changes and Liquidity Raises
A robust relative-value process is vital in enabling insurers to build more diversified portfolios that tap into wide-ranging asset classes including securitized assets, emerging-market debt and private assets while zeroing in on pockets of opportunity.
For insurers that are more loss-constrained, we still see ways to move tactically closer to their strategic asset-allocation plans. Securitized assets tend to be more resilient than corporate credit in sudden market shifts. In April, for example, they generally held up in the market sell-off, outperforming and leading spreads to tighten relative to comparable corporate bonds. But spreads on non-agency residential mortgage-backed securities moved in tandem with corporate credit, so the relative spread advantage versus agency mortgage-backed securities finally grew (Display 1).
