AM Best, a credit rating agency specializing in the insurance industry, has released new findings on the rapid expansion of affiliated investments by U.S. life insurance/annuity (L/A) companies.
Growth in affiliated investments by U.S. L/A insurance companies has accelerated significantly since 2018, with AM Best reporting year-over-year growth of more than 17% in 2024 alone, totaling more than $373 billion.
These holdings have grown at an average annual rate of 13% over six years, AM Best noted in its latest Best Special Report, “PE/AM-Backed Companies Are Driving Growth in Affiliated Investments.”
AM Best said the trend was linked to a growing number of private equity and asset management firms acquiring insurance companies or taking ownership stakes in their operating entities.
AM Best clarifies that fundamental analysis only includes flagged affiliate holdings. If related positions and trades are added, it will push the amounts higher. Subsidiary investments (covering Schedule BA assets, common stocks, bonds and short-term loans) accounted for 76% of the capital and earnings of companies reporting such exposures, up from 45% in 2018. AM Best notes that this expansion amplifies the potential financial impact on insurers if parent companies or affiliates come under stress.
“There are some concerns surrounding affiliated investments that concentrate risk, valuation, transparency and liquidity,” said Jason Hopper, vice president at AM Best.
AM Best highlights that in addition to the base bond requirements, subordinate bonds are subject to an additional 25% risk charge. Historically, publicly traded and mutual insurers have held the majority of affiliated assets, but AM Best confirms that private equity/asset management-backed insurers will become the major holders by the end of 2024. AM Best attributes this rise to the private equity/asset management-backed group’s operating model, which relies on parent company-affiliated asset managers to oversee, originate and structure the investment vehicles used in these portfolios.
“A higher ratio of affiliated investments to total invested assets as well as capital and earnings can indicate concentration, counterparty, transparency and regulatory risk,” said Kaitlin Piasecki, industry research analyst at AM Best. “Higher ratios may also indicate that a company’s operations are more closely tied to its parent and affiliated investment managers, which are responsible for creating, structuring and managing those assets.”
AM Best reports that PE/AM-backed insurers have significantly expanded their affiliated positions starting in 2022, with companies such as Global Atlantic and Athene contributing significantly due to their scale.
The agency noted that the firms increased allocations to structured non-MBS assets, with Global Atlantic also increasing its subordinated mortgage exposure and Athene increasing its subordinated Schedule BA holdings. Across the industry, private equity/asset management-backed mutuals and listed insurance companies collectively hold the vast majority of affiliated investments.
AM Best detailed that by 2024, 98% of subordinated bonds will be private placement bonds, up from 77% in 2014. Half of these carry private letter ratings, and AM Best notes that 90% of PLR-rated subordinated bonds are held by PE/AM-backed insurance companies. Since the PLR is not publicly released, AM Best raised concerns related to collateral visibility, valuation techniques and credit quality.
Schedule BA assets tell a similar story. AM Best explains that mutuals and listed companies hold the majority of the sector’s subsidiary Schedule BA exposure, often concentrated in joint ventures related to real assets. PE/AM-backed insurers, while more diversified within the category, show greater use of mortgages and residuals, which AM Best noted could result in higher loss potential.
AM Best’s review of companies with the highest ratios of affiliated investment to capital and earnings shows that nearly all of the top insurers operate under PE/AM ownership or partnerships. AM Best said these insurers were more vulnerable to financial problems at the parent company level due to the structural consolidation of their investment businesses.
