Public versus private asset-backed finance: Lessons from Australian regulated insurers

Asset-based finance (ABF), including asset-based lending (ABL) and asset-backed securities (ABS), has become an increasingly relevant allocation for insurers navigating lower prospective returns, tighter capital constraints, and heightened focus on balance-sheet resilience.

Australian insurers – operating under The Australian Prudential Regulation Authority’s (APRA) comparatively conservative regulatory regime – offer useful lessons for U.S. insurers evaluating ABF through a statutory and National Association of Insurance Commissioners (NAIC) risk-based capital (RBC) lens.

While the regulatory frameworks of the two regions differ, the core trade-offs Australian insurers face – between yield, liquidity, capital efficiency, and governance requirements – closely mirror the considerations facing U.S. life and P&C insurers today. The experience in Australia highlights how these differences shape portfolio construction decisions, reasons to include ABF in insurance portfolios, and outlines the key considerations insurers should evaluate when incorporating ABF into their investment frameworks.

1. Asset-based finance structures: Public ABS is typically accessed via asset-backed securities, where large pools of homogeneous assets are securitized and issued as tradable, rated securities. Private ABF consists of bilateral lending secured against specific asset pools, often bespoke in structure and illiquid in nature. For insurers, understanding these distinctions is critical, as they influence yield potential, liquidity, capital treatment, and the ability to tailor exposures to liability profiles.

2. Risk and return characteristics: Private ABF typically offers higher yields, reflecting illiquidity and complexity, while public ABS offers lower yields with greater diversification and transparency. Beyond higher yield, private ABF offers insurers greater ability to negotiate covenant packages, collateral eligibility, advance rates, amortization schedules, and servicing controls. From a regulatory perspective, incremental yield must be assessed against capital consumption and risk-management burden.

3. Liquidity and balance-sheet resilience: Public ABS provides observable pricing and secondary market liquidity, supporting balance-sheet flexibility. The buy-and-hold nature of private ABF may be more appropriate for insurers with stable liability profiles and strong liquidity buffers.

4. Capital treatment and efficiency: Public ABS benefits from established capital treatment and ratings-based differentiation. While private ABF can attract higher capital charges due to lack of ratings and valuation subjectivity, these effects may be partially mitigated when exposures are accessed through rated feeder or securitized structures. However, even in these cases, capital treatment may still reflect underlying asset complexity, potential look-through requirements, and structural considerations, necessitating careful capital-adjusted return analysis.

5. Governance and operational risk: Private ABF typically requires enhanced governance and operational controls to meet regulatory standards. When accessed through rated feeder or securitized vehicles, some of this operational burden is externalized through manager oversight, structural protections, and third-party surveillance. However, governance requirements remain meaningful, shifting toward manager due diligence, structural analysis, and ongoing monitoring. While public ABS benefits from standardized reporting and observable market pricing, governance in private ABF, when well executed, can serve as an effective screening mechanism and risk safeguard rather than a drag on portfolio attractiveness.

6. Portfolio construction implications: The Australian experience reinforces that public ABS and private ABF serve distinct but complementary roles within insurer portfolios. Public ABS can form a liquid core allocation, while private ABF may be used by insurers selectively as a yield-enhancing satellite where governance capability and capital headroom permit. Public ABS and private ABF provide diversification through different mechanisms and are most effective when combined.

Indicative capital impact comparisons

The table below provides an indicative comparison for Australian APRA-regulated insurers. Note: It is illustrative only, and actual capital outcomes will depend on asset structure, ratings, duration, liquidity, and insurer-specific stress assumptions.

Source: Janus Henderson Investors, March 2026.

Summary

Australian insurers operating under a conservative regulatory regime offer valuable lessons for U.S. insurers evaluating asset-backed financing. Their experience suggests that private ABF is most effective when aligned with managers that demonstrate institutional-grade underwriting discipline, data transparency, and operational controls. When these standards are met, governance can act as a safeguard rather than a drag on portfolio attractiveness and underscores that the effectiveness of ABF allocations depends not only on return potential, but also on capital efficiency, liquidity, and governance structures.

For U.S. insurers, adapting these lessons can help ensure ABF exposures enhance portfolio resilience while remaining aligned with statutory, regulatory, and stakeholder expectations.

IMPORTANT INFORMATION

Asset-backed finance (ABF) involves loans secured by assets, where the loan value is based on the value of the collateral offered. While it provides a security cushion, it carries risks such as collateral depreciation, borrower default, and potential liquidity constraints during market downturns.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.