From the Desk

Kevin Warsh, the new Chairman of the U.S. Federal Reserve, had a tough day at the office this week. He has been clear that he prefers a Fed that talks less and listens more. And while all that sounds constructive, markets are not yet sure what it means. Warsh had the opportunity to clear the air after his second Fed committee meeting as he caught up with the press. The biggest question for the market is how concerned Warsh is about immediately fighting high inflation.

The more direct question was, with inflation running high, why wait to raise rates? Warsh’s response was varied and nuanced. He suggested he may look at measures other than Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure. In another response, Warsh noted there could be other ways to fight inflation. And at another point, he highlighted that the market had already done some of the Fed’s work.

Markets prefer hard answers. So, their reaction to the chairman’s nuanced comments was to drive the U.S. 30-year bond rate to its highest level in two decades, pricing in more uncertainty about the pace and direction of Fed moves.

All incoming Fed chiefs typically face this same challenge: how to impress upon markets that the Fed will follow through on its convictions. Otherwise, markets may test the Fed by heading in the other direction. It’s a very symbiotic relationship.  

Sources: Bloomberg, The Financial Times, 2026.

A return to inflation concerns in the post-pandemic inflation cycle has reshaped the investment challenge for insurers. Although inflation has eased from its 2022 peak, it has not fully returned to the low and stable regime that preceded the pandemic. For insurers, this matters because inflation affects both sides of the balance sheet at once: it pushes claims, medical expenses, labor costs and indexed liabilities higher, while also eroding the real value of fixed income portfolios that continue to dominate industry asset allocations.

Traditional inflation hedges remain useful, but each has limitations. A new approach to hedging might be needed. For example, Treasury inflation-protected securities and inflation-linked bonds provide direct indexed exposure to consumer price indexes (CPIs), yet their performance can be affected by valuation dynamics, market depth and issuer-specific inflation measures. Inflation swaps offer flexibility but introduce collateral, counterparty and execution costs. Commodities can respond quickly to inflation shocks, particularly energy-driven ones, but are volatile and provide no contractual income. This has encouraged insurers to look beyond financial hedges and toward assets that can combine inflation sensitivity with income generation and long-term capital preservation.

Infrastructure has become increasingly relevant as a possible inflation hedge. The asset class offers potential inflation protection characteristics, supported by a range of contractual, regulatory and market-based mechanisms across sectors. For example, regulated utilities often benefit from explicit CPI-linked frameworks, while toll roads and airports typically include inflation-linked tariff mechanisms alongside demand exposure.

For insurers, the case is therefore not simply that infrastructure hedges inflation. Select infrastructure assets can also introduce return drivers that differ from traditional bonds and listed equities. Furthermore, as inflation remains a recurring feature of the macro landscape, infrastructure is garnering attention as a potential strategic tool for insurers seeking to preserve real value, strengthen balance-sheet resilience and better align assets with long-term liabilities. Capturing these benefits, however, requires discipline: the most valuable assets are those providing essential services, durable pricing power and credible pass-through from inflation to cash flows.

Source: Bloomberg, 2026. 

There is increasing evidence that life insurers in the U.S. and Canada are using private assets to back liabilities. This may be impacting how pension risk transfers (PRTs) are priced. Pension plans in both countries should consider what this trend could mean for them.

A 2025 study by J.P. Morgan Insurance’s North America Equity Research showed the increasing use of non-traditional/private assets to price U.S. PRT deals. This could be contributing to the robust expansion of that market. In Canada, Morningstar DBRS published a report highlighting meaningful allocations to private credit by life insurers. Finally, last week the Canadian Institute of Actuaries released guidance indicating that annuity market spreads over risk-free rates widened by 10 basis points during Q2, while public spreads actually compressed by approximately 10 basis points over the same period. This suggests some combination of public spreads becoming less indicative of how annuities are priced, and private markets making annuity pricing more competitive.

The growth in the use of private assets by life insurers comes from a variety of structures that have made these assets more capital efficient for insurance companies, including asset backed finance (ABF), rated feeder notes (RFNs) and collateralized fund obligations (CFOs). These structures wrap underlying private credit and real asset investments, allowing life insurers to expand their private asset portfolios and capture higher yield per unit of capital charge compared to public markets. These innovations were previously originated directly by mega-sized life insurers for their balance sheets, but have more recently been created by asset managers for consumption by a broader group of insurers.

For pension plans, keeping up with the growth of plan termination liabilities may require consideration of these private asset strategies. This is particularly true in Canada, where the annuity proxy is used in the valuation of solvency liabilities, a key metric used in determining minimum funding requirements. As an added benefit, privates can also act as diversifiers, with a potential for lower mark-to-market volatility compared to publics.

Fortunately, pension plans don't require the same capital-efficient structures as insurers, and can benefit by either investing directly in similar limited partner exposures, or taking advantage of other innovative structures to seek enhanced flexibility, diversification and liquidity, including secondaries, co-investments and evergreen vehicles.

A Willis Towers Watson study of U.S. defined benefit plans suggests that U.S. plans are starting to adopt this trend with an increasing rotation away from public equities into fixed income, private credit and real assets. This has allowed those plans to take advantage of the high rate environment to lock in their funded statuses and potentially boost investment income to pay benefit payments on the back of the higher yields that private assets can offer.

Sources: PRT: High-Growth Opportunity in a Slow-Growth Sector . . . but With Potential Risks (J.P. Morgan Insurance, June 2025), Canadian Life Insurers’ Private Credit Portfolios: More Traditional Than Feared, Less Comparable Than Needed (Morningstar DBRS, July 2026), Year-end 2025 corporate pension funding positions: Drivers of change (WTW Pension 100, June 2026), National Association of Insurance Commissioners, Canadian Institute of Actuaries, 2026.