Management Profiles

Insurers’ Pullback From Hedge Fund Investments Persist

Best’s Special Report: Q1 performance was ‘volatile’

OLDWICK, N.J., July 23, 2018—The U.S. insurance industry continued to reduce its risk appetite for hedge fund investments, as holdings declined year over year by 8.5% to $16.4 billion from $17.9 billion in 2016, according to a new A.M. Best report.

The Best’s Special Report, titled, “Insurers and Hedge Funds—The Pullback Continues,” notes that it was the second straight year that insurers pulled back from its hedge fund investments. In particular, the life/annuity sector halved its hedge fund holdings in the two-year period, to $7.0 billion in 2017 from $14.2 billion in 2015.

In first-quarter 2018, overall hedge fund performance was volatile, ending in a 0.35% return. However, insurers’ top two strategies, multi-strategy and long/short equity, posted negative, albeit marginally, returns for the quarter.

The property/casualty segment also cut back its hedge fund investments, by 4%, to $8.8 billion in 2017 from $9.1 billion in 2016. The health segment’s holdings have been flat at around $600 million for the last three years; however, holdings are concentrated, as nearly a dozen health insurers invest in this asset class. Given the larger scale of its investment portfolios, the life/annuity segment typically has more dollars invested in non-traditional assets, but the property/casualty segment has held more hedge fund investments than its life/annuity counterparts in each of the last two years.

Individual annuity writers have been the driving force behind the pullback, with their hedge fund holdings declining by nearly three-quarters over the last two years.

Life/Annuity has the largest exposure

The report notes that overall hedge fund exposure as a percentage of capital and surplus for each of the three industry segments is minimal. Although the life/annuity segment holds the largest exposure, it declined to 1.8% in 2017 from a high of 3.7% in 2015 in the most-recent five-year period. Similarly, property/casualty exposure has declined to 1.1% from 1.4% over the same period. Given the sub-par returns in the past few years, A.M. Best would not be surprised to see a continued pullback from direct investments in hedge funds as companies try to ride out the volatility on the sidelines.

To access the full copy of this special report, please visit here.