US insurers face declining income from private equity despite growth in holdings: AM Best

US insurers saw a second consecutive year of declining income from their private equity investments, which fell to $7.7 billion in 2023, down from $10.2 billion in 2022, according to AM Best, the credit rating agency.

A recent Best’s Special Report highlights that US insurers’ private equity holdings grew by 10.8%, reaching $146.2 billion in 2023, compared to $132 billion in 2022.

This followed a 3.3% increase in 2022 and a 37% rise in 2021. The 2023 growth was primarily fuelled by $7.4 billion in new investments or additional contributions to existing holdings, while the book value of current assets rose by around $6.8 billion.

Most of this expansion came from life-annuity (L/A) insurers, which represent more than three-quarters of the industry’s private equity investments.

According to the report, private equity investments are heavily concentrated among a small number of large insurers. Fifteen companies, mostly life-annuity (L/A) carriers, hold just over 60% of the industry’s private equity assets, with their allocations averaging around 5% of their total invested assets.

“The ratio of these holdings to capital can be a better guide for determining potential exposure,” added David Lopes, Senior Industry Analyst, AM Best.

The report highlights that the top 15 holders of private equity investments have an average exposure of 40.2% relative to their capital and surplus (C&S).

In contrast, over half of the companies rated by AM Best with private equity investments have exposures that are less than 10% of their C&S.

Lopes continued: “Understanding the performance and risks of the private equity firms that investors choose to invest in requires comprehensive due diligence. 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.”

The report explains that insurers turn to private equity to diversify their portfolios and seek higher returns compared to other asset classes.

However, the relatively small percentage of total invested assets allocated to private equity reflects generally conservative investment strategies and lower risk tolerance.

Insurers are also cautious about the impact of private equity investments on their capital models, as common equity vehicles like limited partnerships carry higher capital charges than rated debt or preferred equity.

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