Best’s Special Report: Strong Performance, New Investments Drive Growth in Insurers’ Private Equity Allocations

OLDWICK, N.J.--(BUSINESS WIRE)--U.S. insurance companies’ private equity investments grew in 2021 by 25.8% to $117.4 billion, from $93.3 billion in 2020 —the biggest year-over-year increase in recent years, according to a new AM Best report.

In its Best’s Special Report, titled, “Strong Performance, New Investments Drive Private Equity Growth,” AM Best states that life/annuity insurers, which account for three-quarters of the insurance industry’s private equity book adjusted/carrying value, are driving the new investments, realizing widespread book value gains. Of the $24.1 billion in year-over-year growth, $12.9 billion was from growth in book value from 2020 (net of disposals) and $11.2 billion from new investments. The overall annual increase follows strong growth of 14.8% in 2020 and 10.0% in 2019.

“New investments in 2021 were concentrated in a few large organizations, with 10 insurers by book value accounting for roughly 60% of acquisitions for the year,” said Jason Hopper, associate director, industry research and analytics. “Furthermore, nearly a third of insurers had new investments totaling less than $5 million, signaling a more-cautious approach by most of the insurers that do not have significant scale or in-house expertise with this asset class.”

Private equity investments span all stages of a company’s life cycle, each with its own unique sets of risks. The insurance industry as a whole has the greatest exposure to leveraged buyout funds, comprising roughly 58% of its private equity investments, although allocations vary by segment. Venture capital accounts for another 29%, and mezzanine financing, the remainder. All three allocations grew, driven largely by life/annuity insurers, though mezzanine funds grew by double digits for all three insurance segments.

“Insurers are still seeking higher returns and opportunities to diversify their portfolios, and the performance of private equity investments has been strong with a low correlation to the public markets,” said Michael Lynch, associate analyst, AM Best.

Insurers use private equity to diversify investments and potentially achieve higher yields compared with other asset classes, but the small allocations as a percentage of invested assets point to more-conservative investment strategies and lower levels of risk tolerance. Of all of the major types of investors, insurers have the smallest average allocations to private equity as a percentage of total assets.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=320172.

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 New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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