Best’s Special Report: Private Equity Holdings Spike for All Major U.S. Insurance Segments

OLDWICK, N.J.–(BUSINESS WIRE)–Private equity investments by the U.S. life/health and property/casualty industries have risen sharply by approximately 25% over a two-year span to $55.4 billion and $16.0 billion, respectively, according to an AM Best special report.

The new Best’s Special Report, titled, “Private Equity Holdings Spike for All Insurance Segments,” states that of overall private equity investments, the insurance industry as a whole has the greatest exposure to leveraged buyout funds—approximately 60% of its private equity investments as of year-end 2018. Venture capital constitutes approximately another 25% of private equity investments with mezzanine financing making up the remainder. One potential dynamic explaining the additional investments, according to the report, especially in the life/annuity segment, is an increased focus on the tech and digital industries. The explosive growth in the insurtech space has sparked interest from a variety of investors outside the traditional insurance industry, which has placed insurers in a position in which they have to defend themselves by investing in new technology, either directly or indirectly by getting involved with technology startups. Insurance companies also have continued to search for additional yield, which is another reason they have bolstered their investments in private equity.

The report notes that just a small portion of companies in each industry segment is investing in private equity funds: approximately 20% of the life/annuity segment and 10% of the property/casualty segment. The U.S. health insurance segment, while dramatically smaller in scale, also has reported consistent annual double-digit private equity investments growth since 2014, to $2.9 billion in 2018, with approximately 9% of companies in the segment currently making such investments.

Investments in leveraged buyout funds grew more than 13% each of the last two years, but they have been under more scrutiny recently due to high levels of financial leverage. The report also notes that venture capital investments in particular are risky, as unsecured loans to start-up companies and businesses that cannot get traditional loans fall under the category of venture capital investments, and market factors can play a large role in the success of the targets, which intensifies uncertainty and risk. However, despite the risks, private equity firms will provide funding in return for owning a piece of the company and its future profits, although an additional risk is that the private equity firm may not be able to carry out its exit strategy, and if it does fail, venture capitalists may simply cut their losses and pull out.

Insurers are realizing that innovation is a challenge that they can no longer ignore and are committing to building innovation solutions in areas that include distribution costs, claims handling, underwriting capabilities and other areas of the value chain that present the biggest challenges. Most private equity risk is borne by higher-rated insurers that have the capital and expertise to better absorb the risk; nevertheless, AM Best continues to closely monitor trends in alternative investments and regularly reviews capital charges to ensure appropriate treatment of this asset class.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=287169.

AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.

Copyright © 2019 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.


Jason Hopper

Associate Director,

Industry Research and Analytics

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Christopher Sharkey

Manager, Public Relations

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Jim Peavy

Director, Public Relations

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