2026 Insurance Midyear Investment Outlook

Taking stock of where we stand midway through 2026, two major themes have significantly influenced markets thus far:  the war in Iran and persistent concerns in private credit stemming from software exposure from artificial intelligence disruption.  Much like 2025, risk assets have continued to perform well thus far in 2026, and neither rates nor credit spreads indicate a near-term recession (see charts below); however, very low spread compensation for default risk and the potential for inflation surprises warrant continued caution for insurers globally.

Yield curve has not been pointing to recession

Credit spreads have remained well contained

We have clearly seen a shift higher in fixed income yields in 2026 with the 10-year US Treasury yield increasing about 30 bps year-to-date (as of May 28) to 4.46%.¹ While the Fed has been on hold this year, investors continue reassessing monetary policy in the face of competing considerations – on the one hand, continued conflict with Iran and the resulting closure of the Strait of Hormuz puts upward pressure on inflation and could call for Fed tightening. On the other hand, the very real potential for an economic slowdown and negative market reaction argues for a potential monetary easing. Notably, the US Treasury market is pricing in modestly higher long-term yields over the next 2-3 years, which are more meaningful to most insurers. Meanwhile, spreads across many fixed income assets are roughly where they started the year after initially widening with the onset of the Iran conflict, leaving all-in yields for US investment grade exposure in the 5.0-5.5% context. While fundamentals do not indicate near-term recession or default risk, we encourage caution on spread duration as spread risks currently appear to be asymmetrically skewed to the upside.

Against this backdrop, “higher for longer” rate dynamics persist, with inflation uncertainty, elevated sovereign issuance and geopolitical risks keeping term premia volatile, particularly at the long end. This creates a mixed investment environment: reinvestment yields remain relatively attractive and well above post‑GFC (Global Financial Crisis) levels, but mark‑to‑market volatility has increased, driving higher market risk capital requirements even where credit fundamentals remain broadly stable. In parallel, credit conditions appear resilient on the surface, with high portfolio quality and no systemic deterioration, yet forward risks are increasingly asymmetric. Tight spreads limit further compression, while geopolitical or inflation shocks could trigger sharp, non‑linear repricing—particularly in longer‑duration or lower‑quality segments. Public markets also appear increasingly crowded, whereas private markets may offer differentiated and idiosyncratic return drivers.

In this environment, diversification becomes a core portfolio construction tool rather than a secondary consideration. The traditional reliance on duration extension and public credit carry remains an important foundation but is less sufficient on its own in today’s environment, as tighter spreads limit upside and elevated volatility increases return variability and capital sensitivity. Instead, insurers need to diversify return sources, reduce exposure to correlated shocks and optimise capital efficiency. Selective allocations to private markets—particularly senior secured private credit and real asset debt—may help address all three dimensions in view of stable income opportunities, differentiated risk drivers and more efficient use of solvency capital.

Private markets remain an increasingly relevant component of insurer portfolios in this context. Senior direct lending continues to see steady demand, supported by gradual improvement in private equity activity and longer holding periods, while its floating‑rate profile and spread premium versus public credit may offer useful diversification and income characteristics. Real estate and infrastructure debt also remain areas of interest, with real estate debt supported by stabilising valuations and infrastructure benefiting from structural trends such as digitalisation and the energy transition. At the same time, outcomes remain dependent on asset selection and market conditions, but these credit‑focused strategies may provide differentiated return drivers and, in many cases, relatively efficient use of capital under Solvency frameworks alongside public fixed income.

Taken together, the mid‑year 2026 macro environment argues for incremental evolution rather than wholesale portfolio shifts, with insurers maintaining high‑quality public credit as a core anchor while selectively allocating to diversified, income‑oriented assets—prioritising floating‑rate, senior secured exposures to help manage volatility, and remaining disciplined on liquidity, governance and capital efficiency.

US insurers

Beyond public fixed income, we believe insurers should continue building out or refining their private market portfolios as well. Software exposure in the direct lending space has been a major headline during the first half of 2026, stemming from concerns that artificial intelligence may significantly disrupt legacy software businesses. While this has garnered much attention and affected some private credit vehicles with liquidity challenges, we don’t believe it is likely to broadly affect private credit, particularly where vehicles don’t have liquidity concerns – namely, institutional portfolios.  Similarly, while commercial real estate (CRE) has been under pressure in recent years, the current environment may offer relatively attractive CRE debt yields – we believe this is an opportunity to enhance capital-adjusted returns for a wide variety of insurers globally.

Within private equity, we remain cautious. Substantial dry powder and high valuations make it a difficult environment from a technical standpoint, and with financing levels still higher than the recent past, the return potential from deploying leverage is not as attractive as it was a few years ago. However, this view is normalizing, particularly on leveraged buyouts versus growth strategies, as deal activity picks up more broadly.

From a regulatory perspective, there are several items warranting continued close monitoring going into 2026. In the US, regulators continue to monitor and consider refinements to the reporting requirements for alternative asset manager-backed insurers. Additionally, insurers in the US continue adapting to recent changes to bond definitions and the associated reporting considerations. One topic getting more attention is the credit ratings process and the prevalence of private ratings in particular; with the NAIC (National Association of Insurance Commissioners) taking a more active role in reviewing and potentially contesting ratings, this is an area that has garnered significant commentary from carriers.

European insurers

European insurers entered 2026 from a position of relative balance sheet strength, but within a macro environment that has become more fragile, asymmetric and geopolitically exposed. While overall sector risks remain broadly stable, supported by solid capital and liquidity, the risk mix has shifted toward higher market and geopolitical uncertainty. The escalation of conflict in the Middle East has reintroduced energy price volatility, reinforcing upside risks to inflation and clouding the outlook for monetary easing. As a result, euro area growth is expected to remain modest, but with downside risks skewed toward more stagflationary outcomes—impacting insurers primarily through yields, spreads, volatility and capital requirements.

Against a backdrop of still generally attractive private market yields, gradually improving capital market conditions and evolving regulatory support, UK and European insurers are continuing to refine private market allocations with a focus on income durability, capital efficiency and alignment with long‑dated liabilities.

Evolving regulatory frameworks across the UK and Europe are also contributing to greater flexibility in how insurers access private markets. Upcoming Solvency II revisions are expected to lower capital charges for high‑quality securitised exposures and improve the treatment of infrastructure and long‑term equity, while UK Matching Adjustment reforms—including MAIA (Matching Adjustment Investment Accelerator), the introduction of highly predictable asset categories, and broader eligibility—are facilitating more efficient deployment into certain illiquid assets. While private equity remains more capital intensive and is therefore approached selectively, improving capital market conditions and potential enhancements to the Long‑Term Equity framework may support more targeted allocations over time.

Asian insurers

Asian insurers, like their peers globally, have been grappling with the impact of heightened volatility driven by geopolitical factors. And, they’ve also had to contend with the implications of changes and adjustments to capital regimes as well as financial reporting standards across several jurisdictions.

Capital efficiency, we feel, remains a key driver of portfolio management, and this has manifested itself through different avenues. Selection of asset classes to help enhance overall yield/return and to diversify the portfolio is an on-going activity. Within this space, under generic risk-based capital regimes, certain sub-asset types may still be efficient from an expected yield/return to stand-alone capital charge standpoint – although differences do exist across jurisdictions, and a careful analysis of any such implications is always warranted. For example, rated structured credit may be treated at par with similarly rated bonds under certain regimes, but with the ability to generate additional yield, and historically positive outcomes from these strategies may make portfolios more resilient.

Other areas that we see interest in is hedging overlays to help mitigate what might otherwise be an “expensive” asset class (e.g., public equities). Any such risk mitigation strategy needs to be designed carefully to ensure regulatory guidelines are met for proper validation. This becomes a highly bespoke strategy, but with the potential to have a significant impact. We note that insurers have also been taking advantage of reasonable all-in yield levels across public fixed income to maintain exposures – but also with a view to re-designing relevant portfolios for better matching and to manage capital implications using matching adjustment where applicable. This could bring about the benefit of higher discount rates and lowering certain components of capital charges.

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