The NAIC’s Capital Markets Bureau monitors developments in the capital markets globally and analyzes their potential impact on the investment portfolios of US insurance companies. A list of archived Capital Markets Bureau Special Reports is available via the index

Schedule BA – Private Equity and Hedge Funds

The Capital Markets Bureau’s Special Report dated as of Sept. 23, 2011, looked at the U.S. insurance industry’s Schedule BA investments, or “Other Long-Term Invested Assets.” This Special Report takes a closer look at insurers’ private equity and hedge fund investments as reported in Schedule BA as of year-end 2010.


The insurance industry’s general account cash and invested assets at year-end 2010 totaled $5 trillion in book/adjusted carrying value (BACV), of which Schedule BA accounted for $232.6 billion (or 4.3%). Among those Schedule BA investments, $61.6 billion (or 1.24%) were designated as private equity and hedge funds. At this percentage, reported private equity and hedge fund exposures were not material to regulated U.S. insurance companies. The investments of domestic insurers in hedge funds and private equity funds also do not appear to be material as a percentage of the total private equity and hedge fund market.

Only 372 of the 4,455 U.S. insurance companies reported private equity or hedge fund investments. Such investments were significant in relation to capital for only a few dozen companies. Of the total, $48.3 billion (or 0.97% in cash and invested assets) was designated as private equity funds and $13.4 billion (or 0.27%) as hedge funds. In addition, there are investments listed on Schedule BA not designated as a hedge fund or private equity fund, but with the same managers as those designated as either hedge funds or private equity funds. These totaled approximately $23.3 billion as of year-end 2010.

Insurers’ Private Equity and Hedge Fund Investments by Strategy

This report focuses on those private equity and hedge fund investments reported with one of 13 private equity or hedge fund “Type and Strategy” designations in Schedule BA, Part 1, column 9, pursuant to the 2010 Annual Statement Instructions. The designations are as follows:

Private equity

Hedge fund

Private equity funds and hedge funds are generally illiquid with significant restrictions on transferability. In addition, private equity funds can only distribute cash when underlying investments, which are themselves illiquid, can be sold. Hedge funds are structured more as trading portfolios and offer investors some ability to request withdrawals at current market values. While many hedge funds offer quarterly or annual liquidity, “gates” and “side-pockets” limit redemptions, and some funds have multi-year lock-ups.

Insurers reported that $61.6 billion of private equity and hedge fund BACV was distributed among the 13 different designated investment types and strategies (as shown in Table 1 below). Life companies accounted for 67% and property/casualty companies accounted for 29% of the industry’s private equity and hedge fund investments.

Of the 4,455 U.S. insurance companies in the NAIC’s 2010 database, only 1,163 had Schedule BA investments and (as mentioned previously) only 372 reported private equity or hedge fund investments. The combined cash and invested assets of these 372 insurers was $3.21 trillion, for an overall average allocation to private equity and hedge funds of 1.9%. 

Among these 372 companies, the 20 largest insurance groups or holding companies held $48 billion (or 80%) of the industry’s private equity and hedge funds in 2010. Thirty-four companies reported private equity and hedge fund BACV exceeding 20% of their capital and surplus. Twelve companies accounted for $31.8 billion (or 51.6%) of all such funds; they had a combined $1.1 trillion in cash and invested assets.

Overall, private equity and hedge funds reported as “affiliated” accounted for only $10 billion (or 16.2%) of all such investments, of which 70% was in the three private equity strategies and 24% were in multi-strategy hedge funds.

“Type and Strategy” Investments Over Time

The following table shows how the insurance industry’s private equity and hedge fund investments, by dollars and designated type and strategy, have evolved over the past six years.

While the insurance industry’s private equity and hedge fund investments have both substantially increased since 2005, private equity has grown faster and now comprises 78% of the total, up from 66% in 2005. (Note: Fair value and actual cost in 2010 were $62.3 and $61.3 billion, respectively; not materially different from BACV.)

Unfunded Commitments

One aspect almost unique to private equity investing is unfunded commitment, or “overhang” liability. When investors subscribe to a private equity fund, their commitment is typically not fully or immediately paid-in; instead, capital is “called” or “drawn-down” over time as investment opportunities arise. Upon becoming a limited partner (or equivalent), such funding commitments are enforceable contractual obligations of the insurer. Subject to the terms of the agreement, such draw-downs generally are not within the insurer’s discretion.

In 2010, insurers’ private equity and hedge funds had unfunded commitments totaling $21.5 billion: $12.3 billion was with respect to leveraged buyout funds, with the rest split between venture capital ($4.3 billion) and mezzanine ($4.4 billion) funds, with hedge funds accounting for a relatively small $471 million. If fully drawn, the $21.0 billion overhang in private equity funding would increase the industry’s exposure in that group by 43%, from $48.2 to $69.2 billion.

Risk and Return

Table 3 shows the year-to-year change in fair value, inclusive of contributions, distributions, other than temporary impairments (OTTI) and other adjustments. (It was not feasible to separate these components consistently, given revisions to Schedule BA in 2008). It comes as no surprise that 2008 was not a good year. Year-to-year changes in BACV (not shown) are nearly the same as for fair value, although merger arbitrage and emerging markets strategies performed worse on a fair value basis, whereas multi-strategy fared better.

As shown in Table 4 below, investment income of $2.9 billion in 2010 had not yet recovered to the 2007 level of $4.5 billion level. Investment income among the previously mentioned funds not designated as a hedge or private equity totaled $933 million in 2010.

Insurers as Providers of Investment Capital

In addition to private equity and hedge funds not being material to insurers’ overall assets, neither is the U.S. insurance sector a material “capital provider” to such funds. The insurers’ $61.6 billion investment is compared with estimates of total private equity and hedge funds’ capital of approximately $4 trillion.

Why Do Insurers Invest in Private Equity and Hedge Funds?

Insurers invest in private equity and hedge funds for the same reasons as other institutional investors: to obtain higher returns, to increase diversification (thereby reducing risk), and to access additional or emerging asset classes. These investments fit within an overall framework of asset-liability management that balances risk and return, while providing for the overall liquidity needs of the insurer. The long-term nature of insurers’ liabilities, especially compared to those of banks and broker-dealers, lends itself ideally to longer-dated or illiquid investments such as private equity and hedge funds. Detailed reporting and valuation guidelines provide state insurance regulators the necessary tools to examine these investments for appropriateness at a given insurer. At the same time, recognizing the risks inherent in these investments, hedge funds and private equity funds also carry the highest risk-based capital factor for investments.

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