US insurers continue to boost private equity investment, AM Best says

By Theo Wayt · June 29, 2020

U.S. insurers increased their private equity holdings by nearly 10% in 2019 as they moved to diversify portfolios and increase returns in a low interest-rate environment, according to AM Best.

The global financial rating agency said in a report released Monday that insurers’ private equity investments totaled $81.3 billion at the end of last year. The ratings agency cautioned, however, that coronavirus and related shutdowns will likely have a “far-reaching and long-lasting” effect on private equity, possibly impacting value in the sector.

“Companies that made private equity investments and were looking for an exit such as an IPO or sale may have to defer doing so because, given the current environment, they may not be able to get the prices they had hoped for,” AM Best said. “Nevertheless, the lower interest rate environment and an abundance of cash-strapped businesses with sound economic models create opportunities for private equity capital.” 

The majority of growth was driven by life and annuity insurers, whose private equity investments grew by $5.6 billion to a total of $61 billion. Investments by property and casualty insurers grew by $600 million for a total of $16.7 billion, while those by health insurers grew by $600 million to total $3.5 billion, according to the report. 

Approximately 60% of insurance companies’ private equity investments are concentrated in leverage buyout funds, while venture capital comprises 25% and mezzanine financing makes up 15%, AM Best said.

International insurers have also gravitated toward the U.S. private equity market. Last week, Spanish insurance giant Mapfre said it would pour €250 million ($281 million) into a private equity fund with a focus on the U.S. and Europe, calling the market “very attractive” due to low interest rates and new coronavirus-related investment opportunities. 

In 2019, 38% of insurers told Blackrock they planned to increase their private equity investments over the next one to two years, making private equity the most popular asset class for insurers alongside real assets.

The ratings agency noted that life and annuity insurers have the smallest allocation to invested assets on average at 1.5%, compared to 2.3% for property and casualty insurers and 7.1% for health insurers. 

“The small allocations as a percentage of invested assets point to generally more conservative investment strategies and lower levels of risk tolerance,” the ratings agency said. “Insurers are also wary of the effects on capital models, as investing in limited partnerships or other common equity vehicles face higher capital charges than rated debt or preferred equity.” 


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