A.M. Best Special Report: Insurers Continued to Pull Away From Hedge Funds in 2016
May 15, 2017 by A.M. Best
Oldwick – Due mainly to rising investor concerns surrounding the performance of hedge funds, the insurance industry has ramped up its pullback of investment allocations to this asset class. According to a new A.M. Best special report, this retreat by the insurance industry was widespread, with 65% of U.S. life/annuity (L/A) insurers and 60% of U.S. property/casualty (P/C) organizations reducing their positions.
The Best’s Special Report, titled, “Insurers Continued to Pull Away From Hedge Funds in 2016,” states that based on 2016 data from year-end NAIC statutory financial statements, the insurance industry’s investment allocations to hedge funds declined approximately 28% to just under $18 billion in 2016 from $25 billion in 2015. Investors have grown impatient as managers charge substantial fees for their services for the industry’s below-market returns, and the oversaturation of the competitive market has led to a number of hedge fund liquidations. This has led investors to continue to pull money out at an increasing pace and report five consecutive quarters of net outflows.
The shift away from hedge funds by insurers was led by the L/A sector, which saw a 42% decline to $8.3 billion in 2016 from $14.2 billion in 2015. While not as drastic, the P/C segment declined by just more than 10%, to $9.1 billion from $10.2 billion over the same time period, while the health segment had total hedge fund holdings below $1 billion. Moreover, just five of the top 20 insurers investing in hedge funds increased their allocations in 2016 from 2015, one of which was the result of a reclassification of the investments as opposed to strategically investing new money in hedge funds. While still maintaining the largest hedge fund portfolio in the insurance industry, American International Group, Inc. pulled more than $4 billion out of hedge fund investments in 2016, accounting for more than half of the insurance industry’s reduction. Metlife, Inc. also had a substantial decrease, with more than $600 million flowing out of its asset class.
Overall, hedge fund exposure remains minimal as a percentage of capital & surplus for each of the three industry segments. While most hedge fund investors in the insurance space are disappointed in performance, there are limited attractive alternatives in which to invest in this current low-return environment. Still, A.M. Best expects most of the proceeds from insurers’ hedge fund portfolios to go back to more traditional investments, such as investment grade corporate bonds and/or commercial mortgage loans and common stock.
To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=261549 .
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