AM Best

SEPTEMBER 30, 2020 08:23 AM (EDT)

Best’s Special Report: U.S. Insurers’ Private Placement Assets Double in Decade, Now Face Pandemic Pressure

 Brian Keleher
Associate Analyst
+1 908 439 2200, ext. 5586

Jason Hopper
Associate Director, Industry
Research and Criteria
+1 908 439 2200, ext. 5016

Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644


OLDWICK - SEPTEMBER 30, 2020 08:23 AM (EDT)
Insurers have significantly ramped up their private placement bond holdings over the last decade—to $1.4 trillion at year-end 2019—but given the effect of the COVID-19 pandemic, an increase in covenant waivers is expected as a means to avoid defaults on these bonds, according to a new AM Best report.

A new Best’s Special Report, titled, “Private Placement Assets Double in Decade, Now Face Pandemic Pressure,” states that the life/annuity (L/A) segment maintains the largest share, about $1.2 trillion (84%) of total insurance industry holdings. The growth rate of private placement holdings held by insurers has increased annually by an average 8.4% over the last five years. In the face of the prolonged historically low interest rate environment, insurers have looked to purchase private placements to earn higher returns than with publicly traded securities, but the spread has converged to within less than one percentage point since 2012.

The continued purchases of private placements have exceeded publicly traded bonds in each segment, increasing the share of private placement bonds as a percentage of total bonds. Since 2009, private placement bonds have seen their share of the bond portfolio increase to 35.5% from 24.9% in the L/A segment, the largest allocation of the three segments. However, the P/C and health segments have dramatically increased their holdings over the last decade, with the P/C segment increasing to 16.3% from 5.1%, and the health segment to15.2% from 3.4%. While AM Best expects insurers to continue to seek private placement bonds, growth rates may slow to some extent as some companies may view giving up the liquidity as less worthwhile.

AM Best expects that many covenant waivers will be approved by insurers to avoid default, aiming instead to achieve better recovery rates, although if investors believe the issuing company’s financial woes result from bad decisions and mismanagement, term negotiation will prove more difficult. The increasing allocations of private placements have not had a substantial effect on liquidity ratios nor the ability of companies to meet their policyholder obligations. Companies with large exposures are characterized by strong credit shops to perform the necessary underlying analysis. As part of an organization’s overall risk management practices, investments should be diversified and there should be no significant concentrations, whether by sector, investment strategy or issuer. To access the full copy of this special report, please visit .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.