U.S. insurers experienced a second straight year of declining income on their private equity investments, which dropped to $7.7 billion in 2023, down from $10.2 billion in 2022, according to AM Best.

A new Best’s Special Report notes that U.S. insurers’ private equity holdings rose 10.8% to $146.2 billion, up from $132 billion in 2022; this followed growth of 3.3% in 2022 and 37% in 2021. That increase in 2023 was driven by $7.4 billion from new investment acquisitions or additional investments in current holdings, with the book value of current holdings increasing by approximately $6.8 billion. Nearly all of that growth was generated by life-annuity (L/A) insurers, which account for over three quarters of the insurance industry’s private equity investments.

Demand for private equity investments had slowed in 2022 compared with 2021, due to a rise in interest rates and concerns about a potential recession, but private equity investments again rose in 2023, as insurers sought higher yields with alternative options.

Investments in private equity remain concentrated in a few large insurers, according to the report. Fifteen companies, almost entirely L/A carriers, account for just over 60% of private equity holdings, with allocations averaging only 5% of invested assets. “The ratio of these holdings to capital can be a better guide for determining potential exposure,” said David Lopes, senior industry analyst, AM Best. The report notes that the average exposure for capital & surplus (C&S) among the top 15 holders of private equity investments is 40.2%. However, more than half of AM Best’s rated companies with private equity investments have exposures amounting to less than 10% of their C&S.

“Understanding the performance and risks of the private equity firms that investors choose to invest in requires comprehensive due diligence,” Lopes said. “Most insurers investing in private equity have larger sophisticated in-house investment management teams. Also, most insurers prefer experienced money managers with a solid history.”

Insurers use private equity to diversify investments and achieve higher yields versus other asset classes, but the small percentage allocations of invested assets point to generally more conservative investment strategies and lower levels of risk tolerance, according to the report. Insurers are also wary of the effects of private equity investments on capital models. Investments in common equity vehicles such as limited partnerships are subject to higher capital charges than rated debt or preferred equity.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=347287.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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