US insurance companies experienced a notable slowdown in their private equity investments in 2022, with a modest 3.3% increase to reach $132.0 billion, according to a recent report by AM Best.
This slowdown followed two years of remarkable growth in the sector. Life/annuity insurers, responsible for the lion’s share of the industry’s private equity portfolio, contributed substantially to the $4.2 billion increase.
The entire industry witnessed $7.2 billion in private equity growth stemming from new acquisitions and additional investments in existing holdings.
However, when accounting for disposals, the net book value decreased by approximately $3.0 billion by the end of the year, leaving a net gain of $4.2 billion. This contrasts sharply with the industry’s impressive growth rates of 14.8% in 2020 and an astonishing 37.0% in 2021.
AM Best’s Industry Analyst, Helen Andersen, explained the slowdown, saying, “Low interest rates until 2021 resulted in record-breaking performance for private equity, providing an attractive option for insurers seeking higher yields. Demand slowed in 2022, though, as rising interest rates and concerns about a recession led to a sharp decline in leveraged transactions, exits, and fundraising during the second half of the year.”
Leveraged buyout funds were the primary focus of private equity investments by insurers, accounting for 59.4% of the total. They faced the brunt of economic challenges but still managed to grow by 5.9% in 2022 within the life/annuity segment.
The report highlighted that the banking industry became less willing to provide loans for significant leveraged transactions in mid-2022, leading to an increase in smaller transactions with lower debt requirements.
Additionally, venture capital activity dwindled in the latter half of 2022, comprising 28.3% of insurers’ investments. Health insurers also reduced their investments in venture capital and leveraged buyout funds, while property/casualty insurers experienced stagnant growth.
Jason Hopper, Associate Director of Industry Research and Analytics at AM Best, provided insight into the outlook for 2023, saying, “A continuation of the slower deal activity has continued in 2023, and deals are expected to remain scarce as long as buyer and seller expectations on valuations remain mismatched. However, private equity firms have high dry powder to deploy, so creative approaches to utilising this capital can be expected.”
