Increasing number of insurers outsource investment management, reports AM Best

A recent report issued by AM Best, the credit rating agency, highlights a growing trend in the insurance sector: more insurers are turning to third-party asset managers to oversee their investment portfolios, with the US life/annuity segment showing the most significant activity.

According to AM Best, this shift is particularly evident among mid-sized life and health insurers, which increasingly rely on unaffiliated investment managers to handle large portions of their portfolios as they seek to remain competitive in a demanding annuity market.

AM Best’s analysis, based on 2024 NAIC statutory filings, reveals that over 43% of life/health insurers engaged a single third-party investment manager to actively manage at least 10% of their invested assets—an increase from 32% in 2016.

Additionally, the percentage of insurers outsourcing more than 50% of their portfolios to unaffiliated managers rose to 35.5% in 2024, up from 26.8% in 2016. AM Best attributes this trend in part to the continued involvement of private equity and asset management firms in the insurance space.

These firms are not only acquiring stakes in life and annuity companies but are also managing significant portions of insurers’ portfolios, even without majority ownership. AM Best notes that annuity companies, with their consistent asset flows and larger portfolios, are attractive to private equity firms seeking steady investment mandates.

AM Best observes that mid-sized insurers are at the forefront of this outsourcing trend. These companies often lack the in-house expertise and scale of their larger peers but still face pressure to offer competitive crediting rates and achieve adequate spread.

Engaging unaffiliated managers gives them access to specialised investment capabilities and asset classes that may be beyond the reach of internal teams. According to AM Best, outsourcing provides a practical and cost-effective way for these insurers to remain competitive in a market increasingly influenced by complex investment strategies.

Although larger insurers often maintain internal investment divisions with broad expertise, AM Best finds that even these companies are working with external managers to access certain segments of the market—particularly private credit and structured assets, which have gained importance in recent years.

The report further notes that while property and casualty insurers are more likely overall to use third-party managers, growth in outsourcing among this group has remained relatively flat.

The report by AM Best also reveals that unaffiliated annuity writers are much more likely to outsource a significant portion of their portfolios compared to those affiliated with larger insurance groups.

Nearly half of unaffiliated annuity companies outsourced more than 50% of their invested assets in 2024, compared to just 27% of affiliated firms. AM Best interprets this as a response to increased competition, particularly from larger entities backed by asset managers with deep investment expertise.

Insurers that engage external asset managers often gain greater access to alternative and structured investments. AM Best reports that life and health insurers outsourcing more than half of their assets typically hold a larger proportion in structured securities such as residential and commercial mortgage-backed securities.

As of year-end 2024, these insurers allocated an average of 16% of their portfolios to various MBS categories, while companies managing their investments internally held just under 12% in the same asset classes. AM Best notes a similar, though less pronounced, trend among property and casualty companies.

The report also includes data on which asset managers are most frequently given decision-making authority by insurers. AM Best identifies BlackRock as the most commonly listed manager, followed by New England Asset Management, Conning Asset Management, Wellington Management, and J.P. Morgan.

According to AM Best, nearly two-thirds of insurers list only one investment manager with the authority to make investment decisions, suggesting a preference for simplified oversight and focused expertise.

AM Best emphasises that while outsourcing provides access to specialised strategies and resources, manager selection remains crucial. Performance in private and alternative asset classes can vary significantly across firms.

Insurers tend to favour asset managers with strong historical performance and are often reluctant to switch providers unless returns diminish or traditional markets become more attractive. AM Best also notes that asset managers are more likely to support insurers that remain committed during periods of market volatility.

As the insurance industry continues to shift toward more complex and diversified investment strategies, AM Best concludes that outsourcing has become a strategic solution for insurers of all sizes.

The report underscores that in a competitive environment shaped by evolving asset allocations and external pressures, working with third-party investment managers is increasingly seen as a way to manage risk, enhance returns, and maintain flexibility in investment decision-making.

“Annuity companies can provide that steady stream and have larger investment portfolios, making them attractive targets,” added Jason Hopper, Associate Director, AM Best.

This report, titled “Growing Number of Insurers Outsourcing Their Investment Management Needs,” is published by AM Best and based on its proprietary data and research. All rights to the content are reserved by AM Best.