In 2022, U.S. insurance companies witnessed a deceleration in private equity investments, marking a mere 3.3% increase to reach $132.0 billion, following a stellar growth trajectory in the preceding year, as per a recent report by AM Best. The detailed insights of this financial shift are encapsulated in AM Best’s Special Report, titled “Growth in Insurers’ Private Equity Investments Slowed Significantly in 2022,” which can be accessed here.

Life/annuity insurers, contributing to three-quarters of the insurance industry’s private equity book adjusted/carrying value, played a pivotal role in the $4.2 billion growth. The industry, on the whole, experienced a $7.2 billion surge in private equity from new investment acquisitions or additional investments in existing holdings. However, the book value (net of disposals) plummeted by approximately $3.0 billion, culminating in a year-end total of $4.2 billion. A stark contrast to the growth rates of 14.8% and 37.0% witnessed in 2020 and 2021, respectively.

Helen Andersen, an industry analyst at AM Best, elucidated, “Until 2021, low-interest rates catalyzed a record-setting performance for private equity, emerging as a lucrative option for insurers in pursuit of higher yields. However, the momentum decelerated in 2022 due to escalating interest rates and recession apprehensions, triggering a steep downturn in leveraged transactions, exits, and fund-raising in the latter half of the year.”

Leveraged buyout funds, constituting 59.4% of private equity investments by the insurance industry, bore the brunt of the economic challenges, albeit the life/annuity segment’s leveraged buyout fund investments experienced a 5.9% growth in 2022. The report highlights a cautious approach adopted by the banking industry in mid-2022, becoming more circumspect in lending to substantial leveraged transactions, thereby pivoting towards smaller transactions necessitating reduced debt. Additionally, venture capital activity, accounting for another 28.3% of insurers’ investments, also witnessed a decline in the latter half of 2022. The investments by health insurers in venture capital and leveraged buyout funds witnessed a decrease and remained largely static for property/casualty insurers.

Jason Hopper, Associate Director at AM Best, anticipates a continuation of this slower deal activity into 2023, stating, “Deals are projected to be infrequent as long as there is a disparity in buyer and seller valuation expectations. Nevertheless, with private equity firms possessing substantial dry powder to deploy, inventive strategies to utilize this capital are anticipated.”

For further details, the full report can be accessed here, and additional information about AM Best, a global credit rating agency specializing in the insurance industry, can be found on their website.

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