A.M. Best Special Report: Insurers Continue to Increase Private Placement Holdings

OLDWICK, N.J.--(BUSINESS WIRE)-- The insurance industry continued to demonstrate its appetite for potentially higher-yielding asset allocations, with a nearly 7% growth in private placements and 144a holdings in 2016, sustaining a growth trend in this asset class, according to a new A.M. Best special report.

The Best’s Special Report, titled, “Insurers Continue to Increase Private Placement Holdings,” states that the life/annuity (L/A) segment maintains the largest share of these holdings, with about $900 billion of the approximately $1 trillion held in total by the insurance industry. The private placement growth rate within the L/A segment has remained relatively consistent over the last 10 years, and was 6.3% in 2016. The property/casualty (P/C) segment has also continued to increase its holdings, albeit at a more moderate pace than the 25.2% average growth that was reported from 2009-2012. While the large growth swings in the health segment are a function of smaller allocations, new investments in private placements by health companies have moderated over the last two to three years.

Since 2007, total private placement bonds have seen their share of the bond portfolio increase to 29.8% from 23.2% in the L/A segment, while the P/C segment has increased to 13.1% from 3.5%, and the health segment to 7.4% from 1.9%. Investors looking to purchase private placement bonds are likely to experience higher returns than those offered by publicly traded securities, a trend that has stood for more than 20 years, but is rapidly converging as the spread has been less than one percentage point in each of the last five years compared with an average of more than two percentage points between 2000 and 2011.

By their nature, private placements are geared toward institutional investors with a higher degree of risk tolerance and a lesser concern for liquidity. In the ongoing persistent low-interest-rate environment, even with recent rate increases by the Federal Reserve, insurers are attracted to the idea that returns from private placements tend to outpace returns from publicly traded bonds. A.M. Best evaluates allocations to private placement investments more cautiously given the limited market-based tools that are available.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=262539.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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Source: A.M. Best