The US insurance industry’s investments in Level 3 assets more than doubled in the last 10 years to $592bn in 2025 with the life/annuity (L/A) segment driving the growth, according to AM Best.
According to AM Best, the L/A segment accounts for 92% of the industry’s Level 3 bond holdings.
“Illiquid investments are better aligned with life/annuity insurers’ liabilities as opposed to health and property/casualty insurers that have greater liquidity needs due to the shorter duration of liabilities,” said Kaitlin Piasecki, industry research analyst at AM Best.
Private equity/asset manager-backed companies have a greater concentration of affiliated Level 3 bonds when compared with other organisation types, such as mutual or publicly traded insurers. Private equity/asset manager-backed insurers draw upon their parent company’s investment expertise to invest in more complex and harder-to-value assets.
“Use of affiliated asset managers or companies that originate and structure underlying funds that the insurance company purchases can increase counterparty, transparency and valuation risks, and could result in reputational harm if valuation is found to be overinflated in a credit event,” said Jason Hopper, associate director, industry research and analytics at AM Best.
According to AM Best, nearly 75% of L/A annuity insurers’ Level 3 holdings are in corporate bond, other financial asset-backed securities, project finance, equity-backed securities and bank loans.
Private equity/asset manager-backed companies account for six of the top 10 companies with the highest Level 3 bond exposure.
