US insurers have more than doubled their holdings of hard-to-value bonds over the past decade, with the life re/insurers spearheading the growth.

A new report from AM Best finds that the life sector accounts for 92 per cent of these “Level 3” assets that rely heavily on internal valuation models rather than observable market prices.

The ratings agency said the insurance industry's investments in Level 3 assets climbed from $238 billion in 2016 to $592 billion in 2025.

Unlike publicly traded securities with readily available market prices, Level 3 assets are typically illiquid investments that require complex financial models and assumptions to determine their value.

Many of these investments are privately originated, highly customised or backed by complex pools of assets that rarely trade on secondary markets, making market-based pricing difficult. In return for their complexity and illiquidity, they generally offer higher yields than more traditional fixed-income investments, AM Best said.

AM Best noted that nearly 90 per cent of the industry's Level 3 investments are rated NAIC-1 or NAIC-2, indicating relatively high credit quality.

“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.

Level 3 bonds represented 14 per cent of life and annuity insurers' bond portfolios at the end of 2025, up from 8 per cent in 2016. By comparison, exposure among property and casualty insurers fell from 5 per cent to 3 per cent over the same period.

AM Best linked much of the increase to the growing influence of private equity firms and asset managers within the insurance industry.

Jason Hopper, associate director, Industry Research and Analytics, AM Best, said: “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.”

Other report takeaways include:

• Nearly 75 per cent 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 ten 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 per cent 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 per cent in 2016.