US re/insurance companies increased their private equity holdings by nearly 10% to $81.3 billion last year, marking four consecutive years of growth, according to AM Best.
The rating agency noted that this asset class continues to be an attractive option for re/insurers looking to diversify their investment portfolios or increase returns in the low interest rate environment.
But analysts also found that companies that made private equity investments and were looking for an exit such as an IPO or sale, may need to defer doing so amid the COVID-19 pandemic environment, as they may not be able to get their desired price.
Nevertheless, the lower interest rate environment and an abundance of cash-strapped businesses with sound economic models will likely create opportunities for private equity capital.
And with re/insurers increasingly pulled back from hedge fund investments, many have shifted allocations to private equity to maintain exposure to alternative assets and achieve better returns, compared with the public markets.
AM Best believes that US life/annuity (L/A) insurers have driven the majority of the growth in private equity holdings.
However, they also have the smallest allocation to invested assets on average at 1.5%, compared with 2.3% for property/casualty insurers and 7.1% for health insurers.
This points to generally more conservative investment strategies and lower levels of risk tolerance, as well as caution about the effects on capital models.
Analysts added that the re/insurance industry as a whole has the greatest exposure to leveraged buyout funds, at approximately 60% of overall holdings. Venture capital accounts for another 25%, and mezzanine financing composes the remainder.
Additionally, the industry has more than $46 billion in commitments for additional investment, more than $36 billion of which are by L/A insurers.