The U.S. insurance industry’s investments in Level 3 assets more than doubled in the last 10 years to $592 billion in 2025 with the life/annuity segment driving the growth, according to a new AM Best report.

Investments that classify as Level 3 come with some valuation and liquidity risk, as they are not actively traded, and therefore lack observable market inputs such as quoted prices and comparable market transactions. These investments are typically illiquid, and valuation is based on complex internal financial modeling that relies on various assumptions and forecasts. According to the Best’s Special Report, the life/annuity 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, AM Best.

Private equity/asset manager-backed companies have a greater concentration of affiliated Level 3 bonds when compared with other organization 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, AM Best.

Other report takeaways include:

  • Nearly 75% of life/annuity insurers’ Level 3 holdings are in corporate bonds, 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, suggesting that their investment strategies are generally associated with greater use of less liquid instruments reliant on model-based valuation.

  • The fair value of approximately 70% of Level 3 bonds held by life/annuity insurers were determined by the reporting entity or a third party contracted by the reporting entity, up from 60% in 2016.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=367199.

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 London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2026 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

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